1. The below is only applicable to clients who are subject to U.S. tax law.
2. Even if you are subject to U.S. tax law, please consult your personal tax or legal advisor to see if crypto loss tax harvesting can benefit you. Kraken does not provide legal, tax or investment advice.
Let’s be honest, nobody likes paying taxes. When we file our returns, it reminds us that a good-sized chunk of our hard-earned money goes to the government, and, if we overpay, we have to wait around for a refund.
Fortunately, there is a way that you can reduce some of the headaches that come with tax day, and perhaps some of the sting that came from an underperforming asset by leveraging your crypto holdings.
It can be done with a strategy called Crypto Tax Loss Harvesting, and the clock is ticking.
What is Crypto Tax Loss Harvesting?
While it sounds complicated and like it may involve some type of farming, Crypto Tax Loss Harvesting is actually very simple. It involves disposing of a crypto asset at a loss. This transaction (see examples below) creates a taxable loss that can offset gains and, in some cases, ordinary income. It does not matter if you are offsetting a gain from a stock, bond, or other type of traditional investment.
What is a Taxable Event?
Specific actions that lock-in gains or losses on your crypto holdings are generally taxable. For example, the following may be taxable events.
- Sell your crypto for another crypto
- Sell your crypto for fiat
- Use your crypto to pay for goods and services
To utilize a taxable loss on your 2019 return, it is VERY important to realize the capital loss (by entering into a taxable transaction) on or before Dec 31, 2019. You cannot offset gains by just claiming that the value of your portfolio has dropped.
Can You Show Me an Example?
Imagine you bought $2,000 worth of Nike stock and $2,000 worth of crypto at the beginning of 2019. The Nike stock increased by 50%, so your portfolio is now valued at $3,000. However, the value of your crypto holdings dropped by 10%, so those are now worth $1,800.
You may want to lock in your capital gains from the Nike stock now, so you sell for a profit/capital gain of $1,000. At this point, you would owe tax on that $1,000.
However, there is a way to reduce your tax bill. If you sell your depreciated crypto holdings, the losses generated may offset your total gains, and reduce your tax bill. Instead of paying tax on $1,000, you would only owe for the net gain of $800.
What if my Portfolio is in the Red but I have no Gains to Offset?
Good news, even if you did not realize gains during the current year, you can generally still use tax loss harvesting to offset up to $3,000 of other forms of income, such as your salary.
For example, if you made $75,000 in salary this year, you could use your capital losses to reduce your taxable income by up to $3,000, reducing it to $72,000.
If your realized losses are greater than $3,000 for the year, the balance may be carried forward to future years.
Remember, the Clock is Ticking!
The deadline to take advantage of crypto tax loss harvesting for 2019 is December 31, 2019, so you need to sell before the clock strikes midnight and rings in the new year.
Fortunately, now that we offer the Kraken Pro app in both the App Store and Google Play, you won’t miss out on this opportunity because you are not in front of your computer!
Kraken does not provide legal or tax advice! Please consult your personal advisor to see how crypto loss tax harvesting can benefit you.
Thank you for choosing Kraken, the secure and trusted digital asset exchange, and Happy New Year!
The Kraken Team
P.S. Have you tried the Kraken Pro mobile app yet?
Download the Kraken Pro App from the App Store or Google Play: