Anyone can apply tax efficient strategies to reduce their tax liability and tax loss harvesting is one of them. Through tax loss harvesting, one can take advantage of unrealized losses to minimize taxable revenue.
In the UK, crypto assets are treated the same way as stocks for tax purposes. As such, the same tax loss harvesting rules apply to cryptocurrencies. The 2018 bear crypto market has so far extended to 2019. It is thus important that crypto users know how to take advantage of tax reliefs to minimize losses.
Reducing Crypto Taxes
How to use bitcoin to reduce taxes? Crypto holders can sell underwater portfolios to generate realized loses that can be used to offset realized gains. By initiating a sale or transfer to another cryptocurrency, a taxable event in Capital gains Tax is triggered. Loses are then used to relief tax on tax gains. This reduces the overall tax liability to the person.
Take an example of someone who bought one Bitcoin (BTC) in January 2017 at $800 per Bitcoin. The person incurred an investment of $800. In March 2017 when Bitcoin was trading at $10,000 a coin, he used his 1 BTC to buy 20 Ether at $500 each. As such, he realized a profit of $9,200 in Capital Gains which is liable to tax. Unfortunately, the Ethereum he held lost value in 2018. He therefore decided to sell off the Ethereum in March 2018 at $100 per ETH, receiving a total of $2000. This means he accrued a loss of $7,000 that he can use to reduce his cryptocurrency tax.
By reporting the $7,000 loss to HMRC, the loss is offset against the gains he made earlier buy trading Bitcoin for Ethereum. In the end, he only has a tax liability of $2,200 as opposed to $9,200 had he not ‘harvested’ loss from his Ethereum holdings.
Losses can also be offset against profits on other portfolios held. Say a person made loses on crypto trading but made profits on Facebook stocks, the said crypto losses offset tax in the gain from Apple shares. Importantly, if loses in the current year are higher than profits, one can elect to carry forward loses to the next year.
In the US, there is the aspect of short-term and long-term Capital Gains. Short-term capital gains attract higher tax rates than long-term capital gains. Hence, short-term loses offset short-term gains first. If there are any excesses in loses after short-term gains are offset, they are further offset against long-term gains. In the event that one doesn’t have any accompanying Capital Gains, loses are offset against income up-to $3,000. If loses are above $3,000, they are carried over to the next year.
Wash sale rule and cryptocurrencies
When disposing assets defined as securities for the purpose of tax harvesting, one has to adhere to a 30 day waiting period before repurchasing the same or similar asset. If purchase is done before 30 days, one forfeits tax harvest loss relieve.
However, since Bitcoin is not referred to as a security in the UK, one can dispose and immediately repurchase Bitcoin. This gives them the same holding position with less tax to pay. Which is a good way to manage in the highly volatile crypto environment. Nonetheless, care should be taken when dealing with altcoins that are considered token securities by HMRC. Contrary in the US, cryptocurrencies are defined as property for tax purposes. As such, any cryptocurrency can be disposed and repossessed at user’s wish albeit coming at a cost. Given that the US treats its Capital Gains in terms of short and long-term, repurchasing crypto assets restarts the Capital Gains clock thus one has to wait another year to start enjoying long-term CGT.
While losses harvested have to be reported before the end of the financial year in some countries such as the US, UK citizens can claim tax relief up to 4 years after the date of loss.
Filing loses in tax returns is agreeably a beneficial act. Consequently, crypto holders need to keep proper records of their activities associated with crypto assets.