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What is Bitcoin Tax-Loss Harvesting?

Bitcoin Tax-Loss HarvestingWhat is Bitcoin Tax-Loss Harvesting?

If you go back to 2013, the market cap for bitcoin was a little over $1 billion. Later on, this number would explode more than 1000-fold to a value of more than $1.2 trillion! However, the market cap as of January 2023 is closer to $300 billion.These are the kinds of huge swings up and down that the world of cryptocurrency is famous for. These swings are also one of the reasons why so many people are interested in crypto tax-loss harvesting.

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The bigger the dips in the market, the bigger the opportunity to enjoy huge benefits through this strategy for lowering your overall tax liability. So what is bitcoin tax-loss harvesting, and what are the benefits that it provides? Read on to learn all about this tax strategy and how it works!

What Is the Bitcoin Tax-Loss Harvesting Process?

Cryptocurrency gains are classified as capital gains. When someone’s investments increase in value, they will often need to pay some percentage of those gains as part of their tax liability. However, you can sometimes avoid paying some of these taxes if you suffer capital losses.

Capital losses occur when someone makes an investment that goes down in value instead of up. Of course, if someone’s investment goes down in value, there is no gain to be taxed. However, what happens if someone invests in two things at the same time and one goes up and the other goes down in value?

In this case, you can add the capital gains and losses together. If the overall losses are bigger, then it is not necessary to pay taxes even on the one investment that went up in value.

If the capital gains are larger, then it will be necessary to pay capital gains taxes on them. However, you will only pay taxes on the portion of the gains that exceed the magnitude of the capital losses.

In other words, the bigger your losses in one area, the more you can use them to offset your gains in another area.

For this reason, people sometimes make a point of incurring strategic capital losses so that they can offset their capital gains and pay fewer taxes. This is the essential bitcoin tax-loss harvesting strategy, one of the more powerful advanced strategies for investing in crypto.

Someone who has capital gains in another area can sell off their cryptocurrency at a losing price. That will offset their capital gains and decrease their tax liability.

Avoiding Negative Side Effects

In fact, if an investor is lucky, they can do all of this and then buy their recently sold investment back again. If the cryptocurrency price has not shifted, then this allows people to lower their tax liability without any real negative side effects from selling an investment at a loss.

When to Enjoy Bitcoin Tax-Loss Harvesting Benefits

Based on this understanding, one of the requirements for this strategy should be clear. There is no point in using this strategy if you do not have some capital gains to offset.

On top of that, if you already have capital losses equal to or greater than your capital gains, there is also no point in using this strategy. But if your capital gains exceed your capital losses, this might be the perfect opportunity for you to apply this strategy.

However, many people who use strategies like this use them at the end of the tax year. After all, if you wait until the tax year has ended to sell some of your investments at a loss, then you cannot use those capital losses to offset your capital gains from the previous tax year.

There is another situation in which it may make sense to employ this strategy. If there is a large dip in the value of cryptocurrency, then you can incur an unusually large loss by selling during that dip. Some people take advantage of market dips to incur larger capital losses.

What Is the Bitcoin Tax-Loss Harvesting Limit?

There is no limit to using this strategy to offset your capital gains. However, you may also be able to deduct as much as $3,000 each year from your regular income by incurring capital losses. Once you have hit that limit, there is no point in continuing this strategy for purposes of offsetting your income.

You may also want to keep in mind that if you have excess losses, you can carry them into the future to offset future capital gains and income. This is another reason why so many people prefer to incur capital losses during market dips.

If the tax year ends and you do not have any capital gains or income to offset, that does not mean that your capital losses are wasted. You can come back to them in the future to lower your tax liability.

The Bitcoin Tax Bill Timeline

This tax savings strategy may not always be available in the same way. Currently, you can sell an investment and then buy it right back again after decreasing your tax liability.

However, this is not legal when it comes to securities. Some people consider that this same law should apply to cryptocurrency. There is a decent chance that future lawmakers will agree.

Understand the Nuances of Bitcoin Tax-Loss Harvesting

Many people hear about Bitcoin tax-loss harvesting and assume that it is a complicated process. Although there is some truth to this, enjoying the benefits of this tax strategy can be much easier than some people might imagine. Depending on the situation, using this strategy can provide incredible value by lowering someone’s tax liability for years.

To learn more about how to take care of your financial health and future, reach out and get in touch with us here at any time!

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