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Crypto Tax-loss Harvesting

dleer.ious 26 84

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Crypto Tax-loss Harvesting

Disclaimer: I am in no way a tax professional and this is not tax advice. This article is written from the perspective of a multi-chain DeFi user/ degenerate NFT and derivatives trader/ stock…

By dleer.ious

Disclaimer: I am in no way a tax professional and this is not tax advice. This article is written from the perspective of a multi-chain DeFi user/ degenerate NFT and derivatives trader/ stock equities and options trader who is going to have a massive tax bill at the end of the year. Luckily for me, I have taken a lot of juicy losses this year which can be used to directly offset my capital gains.


The most important thing to take away from this article is the deadline to submit capital losses for tax-loss harvesting is December 31st — which is right around the corner. Tax-loss harvesting allows you to sell investments that are in the red and offset realized investment gains with those losses. This even applies to NFT’s, shit coins, liquidated positions, expired options, etc.

In addition to directly offsetting realized gains, you can offset up to $3,000 of ordinary income or federal income taxes per year with losses. Any remaining losses can also be carried into the future and used to offset future gains.

Tax-loss Harvesting — Why Crypto is Best

Crypto assets are recognized as “property” which is the best case scenario for tax-loss harvesting. This is because there is no Wash-Sale rule, which exists in traditional markets. “The Wash-Sale Rule states that, if an investment is sold at a loss and then repurchased within 30 days, the initial loss cannot be claimed for tax purposes.”-investopia.com.

No Wash-Sale rule means you can sell a crypto asset at a loss, rebuy it right back, and still count it as a capital loss. Personally I would wait at least 24 hours to avoid potential scrutiny from the Tax Man, but that’s just me. This allows you to continue holding the investment long term while maximizing the tax benefits of a down position.

Rug Pulls, Scams or Lost Funds — Can I Claim?

Crypto assets that are stolen from an investor are unfortunately not tax deductible as this is considered a “personal casualty loss.” Stolen funds can be reimbursed via insurance claim but that is a subject for another article.

If a crypto token or NFT project has “rug pulled” and the value of the asset goes to zero, or close to zero, you can claim the loss on your taxes. If the rugged asset can be traded, investors can claim the loss by simply selling. However, a lot of the time a rug pulled crypto asset becomes worthless and cannot be traded. In this case, two strategies to claim the loss are send the asset to a burn address or send to a friend in exchange for a nominal amount (e.g., $0.01).

“I lost my Bitcoin in a boating accident, can I claim the loss on my taxes?” No. Lost crypto assets also fall under “personal casualty loss” and are not tax deductible.

Source of the information above: https://blog.cointracking.info/do-you-pay-taxes-stolen-hacked-lost-crypto/

Crypto Tax-loss Harvesting Software

Most investors hold and trade crypto on one or two centralized exchanges, which makes collecting trading data pretty easy. However, in my case I operate on six different blockchains and five separate centralized exchanges, making thousands of transactions per year. Most of the transactions are taxable events. It is not feasible to compile and process this data manually.

Luckily, there are dedicated cryptocurrency tax software offerings like ZenLedger.io which you can use to automate this leg work for you and even integrate with TurboTax. Based on my somewhat limited research, ZenLedger plans offer the most complete on-chain and CEX integrations. Based on my specific activity, I will need to utilize the “Executive” plan which costs $399 per year. Well worth it for me considering the tax-loss harvesting service alone will save me thousands of dollars.


Tax-loss Harvesting — Traditional Markets

Investors in the stock market (including options traders) can submit their capital losses for tax-loss harvesting purposes. As noted above, the stock market is subject to the “wash-trading” rule which means investors cannot buy-back an investment until 31 days after selling to be able to claim the loss. There are many automated tax-loss harvesting software options for traditional markets and the two I am looking at are Wealthfront and Betterment.


The thought of taxes and tax-loss harvesting in crypto for multi-chain and multi-CEX users is pretty intimidating at first. However, with crypto specific tax software like ZenLedger, what used to be damn near impossible is now only a pain in the ass. Do not let intimidation or laziness prevent you from saving a lot on your taxes — take advantage of tax-loss harvesting BEFORE DECEMBER 31ST.

I will follow up this article with my experience using ZenLedger.io after I am completed with my personal tax-loss harvesting.

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