‘Biggest mistake’ is not using tax loss harvesting: Koinly head of tax

Failing to utilize tax loss harvesting is one of the biggest mistakes people can make on their tax returns, according to the head of tax at Koinly.

Failing to utilize tax loss harvesting is one of the biggest mistakes people make on their tax returns, according to Danny Talwar, the head of tax at crypto tax software firm Koinly.

Speaking to Cointelegraph ahead of the April 18 United States tax deadline, Talwar said that for those investors who experienced losses in the market over 2022, this is the last chance to report the loss and “try and get some of that benefit” by offsetting it against any gains made in the previous year.

Tax-loss harvesting occurs when an investor sells at a loss to offset the amount of capital gains tax owed from selling profitable assets.

“It’s probably the biggest mistake people make, not realizing they can use tax loss harvesting,” Talwar said.

“A lot of people might think, ‘oh, I’ve not made any money on crypto, so it’s not taxable this year,’ but you can actually get that benefit. So that’s probably one of the biggest strategies people can use.“

However, he also noted that to claim a loss, you “have to have realized the loss in some way.“

“The IRS was quite clear that you can’t claim a loss on something if its value has gone down and you haven’t actually sold out of it.“

Talwar says to be mindful that tax loss harvesting can lead some to commit a "wash sale," an IRS regulation that prevents an individual from selling or trading stock or security at a loss, then buying the same asset within 30 days of the sale.

As digital assets have not been classified as securities, crypto is currently not under these same rules, however, U.S. President Joe Biden's upcoming budget proposal has proposed a crackdown on crypto wash sales.

"Rules can change very quickly, and they can change retrospectively. So you really have to watch out as you have to understand the risks.”

Talwar said the IRS may still investigate whether a transaction was genuine "if you're doing something just to get a tax benefit."

“I wouldn't be encouraging people to do it, but at the same time, people are doing it."

Talwar believes that those caught up in coin scams or exchange collapses such as FTX unfortunately might not be eligible to claim them as losses after the Internal Revenue Service (IRS) clarified the matter.

"The IRS actually came out and clarified the approach on that, because people were wondering whether they could claim losses on things like FTX or even rug pulls," he said.

Ultimately, Talwar says "the best strategy is to actually pay tax" and get professional advice ahead of tax season as talking to an accountant can help uncover “what reliefs and benefits are available.”

"Obviously, using an accountant can help to navigate any of that complexity or challenge around what to do."

For those that don’t have their documents ready, Talwar says there is the option to file for an extension but they’ll “still have to pay the taxes by April 18."

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Magazine: Crypto audits and bug bounties are broken: Here’s how to fix them

Bitcoin

MicroStrategy’s recent sale of a portion of its Bitcoin treasury holdings puts cryptocurrency tax-loss harvesting into the spotlight.

Business intelligence firm MicroStrategy made headlines ahead of New Year’s Eve as the sale of a portion of its Bitcoin (BTC) holdings drew the attention of industry experts and critics.

A regulatory filing with the United States Securities and Exchange Commission (SEC) on Dec. 28 detailed the first time the firm sold some of its BTC since its high-profile adoption of the preeminent cryptocurrency as its primary treasury asset.

MicroStrategy made waves in the industry in 2021 as it began amassing significant holdings of BTC, with founder Michael Saylor touting the asset as a superior store of value to fiat currency as a primary reason for the move.

Given Saylor’s role as a staunch Bitcoin proponent over the past two years, MicroStrategy’s decision to sell some of its BTC drew attention across the industry. However, the company’s SEC filing outlines clear intent to generate a tax benefit.

MicroStrategy’s subsidiary MacroStrategy bought 2,395 BTC for approximately $42.8 million between Nov. 1 and Dec. 21 at an average price of $17,871 per BTC. It then sold 704 Bitcoins on Dec. 22 at an average price of $16,776 per Bitcoin for $11.8 million, highlighting its intent to reduce its tax bill:

“MicroStrategy plans to carry back the capital losses resulting from this transaction against previous capital gains, to the extent such carrybacks are available under the federal income tax laws currently in effect, which may generate a tax benefit.”

Cointelegraph reached out to international tax attorney and CPA Selva Ozelli to unpack MicroStrategy’s Bitcoin sale and the reasoning behind it. As she explains, selling cryptocurrencies for a profit in America would require the payment of capital gains tax:

“Some investors choose to reduce their capital gains in a given tax year by selling some of their digital assets at a loss. This is called tax-loss harvesting.”

Ozelli said that the practice is common for individuals in the cryptocurrency space, given that assets like BTC are treated as property by the Internal Revenue Service (IRS) and subject to capital gains and losses rules:

“Furthermore, the wash sale rule, which prohibits selling securities at a loss and reacquiring them within 30 days does not apply. Because crypto is not a security, there is no crypto-specific wash sale rule.”

MicroStrategy made use of this exception, reacquiring 810 BTC for approximately $13.6 million in cash just two days after realizing a loss on the sale of a portion of its holdings.

Ozelli highlighted the volatility of cryptocurrency market prices as an opportunity for retail and institutional investors to realize and harvest capital losses. The challenge lies in identifying assets that present the greatest opportunity for tax savings:

“The difficult part for investors is identifying which of the digital assets in their portfolio have the highest cost basis (original purchase price) when compared to the current market price.”

Nonfungible tokens (NFTs) also present another avenue to reduce tax liabilities. Renowned DJ Steve Aoki has been selling a variety of NFTs on OpenSea, with his activity publicly viewable on his verified profile.

Reports speculate that Aoki may have been looking to carry out tax-loss harvesting. Cointelegraph has reached out to the DJ’s publicist to ascertain the reason for the sale of hundreds of NFTs from his extensive collection.

tax-loss harvesting.