Why Your Year-End Summary Matters for Your Crypto Investments

Are you a rapid fire ICO investor who can’t catch a break? Did you buy into bitcoin near the recent high, only to see the price tumbling shortly after? If so, fear not, you might have some advantages in your losses but only if you harvest them. “But Drew!” you cry, “losses are always bad”. Fear not crypto investor, while you may have lost money on one transaction (or several); you may be better off taking your lumps this tax year in order to take your losses to offset your gains both this year and in the future.

Part of the reason behind this is if you have more than $3,000 of losses in excess of your capital gains, you will have to carry that loss forward against future capital gains. You will be able to take $3,000 of capital loss against your ordinary income each year if there is no capital gain to offset. Another important thing to consider is that your capital losses do not have a limitation to the number of years they can be carried over, so it is more advantageous to liquid failed ICO tokens now, especially if you think they are never going to recover in value.

The idea is to reap the benefits of the capital losses against any gains you have instead of holding on to worthless coins throughout the years. Even more so, the biggest reason you will want to harvest losses right away is that your losses will retain their character, meaning long term losses carried over to the next tax year will be applied to long term gains in the next year before reducing the short term gains, meaning that your tax advantaged long term gains will get reduced before your short term gains are. Don't sit on losses, instead of liquidate them when they are short term capital losses to preserve your long term capital gains first.

Example:

Dave has a long term capital gain of $2,000 in 2017, he has $10,000 of short term loss (poor Dave, this is why we do our due diligence on ICOs). His total taxable capital gain for 2017 is $0 and he can claim $3,000 of loss against his $50,000 of wages meaning his total income is $47,000 for 2017.  Dave carries forward short term loss of $5,000 to 2018. In 2018, he has the same wages but this time he has short term capital gains of $6,000 and long term capital gains of $6,000. His total gain is $1,000 short term capital gains and $5,000 of long term capital gains which at his income bracket would be capital gains tax of 25% on the short capital gains and 15% on the long term capital gains ($250 and $900 for a total of $1150). If his losses were long term when they were carried over from 2017 he would instead have a long term capital gain of $1,000 and a short term capital gain of $6,000. This leaves him with taxes of $150 and $1,500 for a total tax of $1,650 on his capital gains. Harvesting short term losses saves Dave $500 in taxes, illustrating how critical the type of loss is when we are carrying it over to the next year.  

As we see with Dave in the example, the type of capital loss matters .The ideal type of loss to be carried over is short term, not long term, as long term capital gains rates are tax advantaged compared to your short term capital gains rates which are the same as your marginal tax rates.

Now is the time to be looking at your portfolio and deciding whether or not you should be harvesting your losses. If you need help please reach out to us to give individual guidance on your investments and always talk to a tax professional before making any choices for your tax situation. Make sure you know the risks before investing in anything. I am not giving you specific advice in this article about your specific investments, merely proposing your tax benefits based on your capital losses.

If you want more info without having to talk to me, feel free to check out IRS Pub 550 (here) or schedule a free consultation about your crypto currency taxes. 

Andrew KernoskyComment