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Tax-Loss Harvesting
Table of ContentsTax Loss Harvest Intro....................................................................................Page 3
What is Tax-Loss Harvesting?........................................................................Page 4
How ZenLedger Helps Harvest Losses?........................................................Page 5
How ZenLedger’s Tax-Loss Harvesting tool works.......................................Page 6
Bottom Line.....................................................................................................Page 7
Tax-Loss HarvestingSo you bought your first Bitcoin, Ripple or Etherium based on the recommendation of your friend - but bought at the wrong time and now you’re looking at a paper loss? Don’t let that unrealized cryptocurrency loss sit there - put it to work for you at tax time.
While determining - and paying - your taxes each year can be a stressful period, the good news is that ZenLedger can help mitigate some of that stress. In addition to providing tax forms that you can give to your CPA or use in your tax filing, we provide a free Tax-Loss Harvesting estimator that can be used as part of a strategy to help you reduce investment losses.
Because the IRS treats cryptocurrencies as investment properties — similar to a stock or bond — they are subject to capital gains taxes. Under the IRS’ 2014 guidance, users must record each transaction and compute the aggregate capital gain or loss each year for tax purposes. While nobody enjoys experi-encing a loss, smart investors leverage any losses to offset short-term capital gains else-where in their portfolio — or even offset up to $3,000 of their income.
Let’s take a look at how this strategy, known as tax-loss harvesting, works and the unique rules that apply to investors involved with cryptocurrencies.
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What is Tax-Loss Harvesting?Tax-loss harvesting is the practice of selling an asset that has declined in value in order to realize a loss. These losses can offset any short-term capital gains for the year and/or ordinary taxable income by as much as $3,000 per year. By some estimates, tax-loss harvesting can increase after-tax annual returns by between 0.15% and 0.25% per year.
Andrew Gordon, JD/CPA, President of Gordon Law Group, Ltd, is an expert in cryptocurrency taxation and legal structures. His practice has many clients who are crypto investors at the individual or fund level. That’s how he explains tax-loss harvesting for crypto: “Why do you want to do it? What’s the benefit of doing tax-loss harvesting? First of all, let’s say you have gains. During the year you traded a bunch of crypto and you have accrued gains, and you are currently in a gain position. By selling some now at a loss you can use that loss to offset your current crypto gains. So, you can reduce your current gains by year end by selling your crypto at a loss. Also, you can offset other capital gains, so it doesn’t have to be crypto, it can also reduce stocks, other securities. Even sell of your real estate. So it’s not just crypto.”
After realizing the loss, investors can purchase a similar asset to maintain an optimal asset allocation and expected returns. The only catch is that the IRS’ Section 1091 wash sale rules prevent repurchasing a “substantially identi-cal” security 30 days before or after the sale. They want transactions to have a real economic value rather than a tax-only rationale.
The IRS makes it clear that the wash sale rule only applies to “shares of stock or securities” in Section 1091. At the same time, the IRS made it clear that cryptocurrencies are “property” in its 2014 guidance. This means that cryp-tocurrencies may not be subject to the IRS wash sale rule, making tax-loss harvesting a lot easier.
According to Andrew Gordon, JD/CPA, “The wash sale rule is really an opportunity and tax-payers and crypto investors can use the tax law as it stands today to our advantage. Maybe one day the IRS will issue a different guidance, but under the current tax law there is a lot of opportunity for crypto investors to take advantage of the lack of the wash sale rule apply-ing to crypto.”
Cryptocurrency investors could theoretically sell every losing cryptocurren-cy position and simply buy it back again to harvest the loss. Since these losses can carry forward, they could even “bank” them to offset future capital gains or income down the road. Aggressive investors could use this strategy to avoid paying taxes — a primary reason for the wash sale rule.
Despite the potential for strong tax savings, cryptocurrency investors should try not to abuse the strategy. The IRS could argue that an immediate sell-buy transaction had no substantive economic value and therefore could not be used to offset capital gains or income. Even if the IRS wouldn’t win the fight, the cost of the fight might outweigh the benefits.
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How ZenLedger Helps Harvest LossesZenLedger helps investors automate tax-loss harvesting by identifying opportunities with a Tax-Loss Harvesting Tool and auto-filling popular IRS forms during tax season. By importing trans-actions across exchanges and wallets, the plat-form finds every opportunity and ensures that your tax return is accurate to avoid any issues with the IRS.
Don’t forget to download our free Tax-Loss Har-vesting Worksheet to see how to get started with the strategy in your portfolio.
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Our tax loss harvesting tool lets you know how many unrealized capital losses you have in each token type. Once you see this preview, you can then decide if you want to realize the loss. You can decide which token(s) you want to realize the loss on, and by how much.
Launch the Tool
After you upload your transactions, you’ll see a menu item on your dash-board:
Click on this link and we will begin to run our tool. It will take about 15 sec-onds to process.
Read the Results
The output of our tool is a Google spreadsheet that will open in a new tab of your browser. Each tab represents your unrealized capital loss.
The first two tabs are summaries of your total potential losses to harvest, organized by currency. You can toggle between LIFO and FIFO accounting methods in the spreadsheet. There will be a difference between the two.
Summary by FIFO
This tab summarizes your losses as accrued by using the FIFO accounting method (more widely recommended by tax experts). Please note: You must be consistent year to year and between your tax-loss harvesting and your reporting on your 8949 or Schedule D. You cannot switch between these, you have to choose one and stick with it.
Summary by LIFO
This tab summarizes your losses as accrued by using the LIFO accounting method. Please note: You must be consistent year to year and between your tax-loss harvesting and your reporting on your 8949 or Schedule D. You cannot switch between these, you have to choose one and stick with it.
FIFO/LIFO Ordering of Sells
This table shows you all of the coins you currently own that have an unrealized loss using either FIFO or LIFO Accounting method. This is the raw data we use to create your summaries on tab 1 and 2.
Realize Losses by Selling Your Crypto
Once you see where you have losses to harvest, it’s up to you to take action: share this data with your CPA so the two of you can decide on the best approach, or login to your exchange(s) and sell your coin(s).
The ZenLedger tax-loss harvesting tool tells you what coins have unrealized losses, but we do not direct you to an exchange or wallet to sell from. This is because all your coins are in the same “accounting” bucket.
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How ZenLedger’s Tax-Loss Harvesting tool works:
Check out the explainer video for our tool from CEO Pat Larsen below.
https://youtu.be/hOKXz_8hoyM
To learn more about the rules and requirements around crypto tax-loss harvesting watchthis 30-minute recorded webinar with Pat Larsen, CEO and Co-Founder of ZenLedger, andAndrew Gordon, JD/CPA, President of Gordon Law Group, Ltd. (the words "30-minute recorded webinar" 06
Tax loss harvesting is a great way to leverage any unrealized losses to offset short-term capital gains or income. Since they aren’t subject to wash sale rules, there is very little downside to the strategy and it could be used to realize a significant increase in after-tax returns. The key is exercising some discretion and using tools like ZenLedger to help.
The Bottom Line
If you have any questions about how to complete your cryptocurrency taxes and how ZenLedger can help, please send them to [email protected]
“Yes! I never thought I’d be so happy to see 47K in losses! I just bought the premium plan and will recommend your software to others. Thanks for the help!”
“I restated my taxes from 2013 using ZenLedger and found $235,000 in overpayment to the IRS”
“Not only have I told my friends but my CPA loves the software!”
What Our Customers Have Said
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