This post was last updated on July 11th, 2019 at 08:08 pm
Today’s episode is a departure from the usual format. Instead of an interview, you’ll hear a short public service announcement about tax-loss harvesting.
The reason why we’re posting this now is that many people feel that we are about to head into a bull market. There are a number of signs that seem to be indicating this. That said, this episode is for informational purposes only and please don’t construe this as investment advice.
Even though we could potentially head into a bull run, a lot of people have sustained huge losses since the bear market of 2018 – 2019.
In this period between the bear market we are currently in and the potential bull market that we may experience, it would behoove a lot of people to consider doing some tax-loss harvesting. With tax loss harvesting, you can realize a lot of losses you’ve experienced so that you can lock them in against future tax payments.
To explain tax-loss harvesting in more detail, you’ll hear from my friend, Zac McClure, co-founder of TokenTax.
Topics Discussed In This Episode
- What tax-loss harvesting is
- What is and isn’t allowed with tax-loss harvesting
- How much you can deduct against your ordinary income if you’ve already used up all your gains
- The deadlines for tax-loss harvesting
- Whether you can carry back losses
- Cryptoinvestor Weekly Newsletter
- Clay Collins
- Zac McClure
- Zack McClure on Twitter
- Tax Loss Harvesting
Clay: Hey, this is Clay, and today I’m calling an audible. So you’re not going to be hearing an intro, an outro et cetera for this episode because I am editing this myself. You’re hearing this content because at the last minute I had to cut the interview that we were originally going to run today because the content just wasn’t up to my standards. I did everything I could to make the originally scheduled program work, but I just couldn’t get the content where it needed to be. So my apologies [00:00:30] to the person whose interview we were about to run.
Today, instead of hearing an interview, you’re going to be hearing a short public service announcement about tax loss harvesting specifically as it relates to crypto. And the reason why we’re posting this now is because many people feel that we’re headed into a bull market after this bear market. I’ve even heard a few marginally credible sources claim that Bitcoin could be at $20,000 by the end of this year. Crossing my fingers.
Meanwhile, [00:01:00] a lot of crypto investors have sustained huge losses in the current bear market. So right now during this period between a bear market and a potential bull market where prices are going sideways, it would behoove a lot of people to consider doing some tax loss harvesting.
To explain tax loss harvesting in more detail, you’re going to hear from my friend Zac McClure, co-founder of Token Tax. Zac is who I personally go to to help me out with this stuff. In this short episode, you’re going to learn what tax loss harvesting is. Two, [00:01:30] what’s allowed and what isn’t. Three, how much you can deduct against your ordinary income if you’ve already used up all your gains. Four, the deadlines for tax loss harvesting. And five, whether you can retroactively apply crypto losses on tax gains you’ve paid for in previous years.
We’ll get to the PSA in just a second. But before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the privacy coin Veil, which funded this episode and made it possible.
Veil defines itself as [00:02:00] privacy without compromise providing anonymity through a combination of technologies like Ring CT. Having launched this year with over one million dollars in seed funding, Veil boasts an experienced team including members working on Ravencoin, PIVX and more. Before it’s launch, the Veil team released the X16R mining algorithm, which has been adopted by projects seeking resistance to A6 and FBGAs. Veil’s high bred proof of work and proof of state consensus lets users mine the coin, stake or both. Veil states that staking [00:02:30] allows its holders to earn rewards anonymously by holding coins in their wallet. Find Veil on leading data feeds, like Nomics, CoinMarketCap, Blockfolio, and CoinGecko. To learn more about Veil, check out their website at Veil-project.com. Join their Discord and telegram chats or follow them on social media @projectveil. Thanks again to Veil for making this episode possible, and again, to learn more about them, you can go to Veil-project.com.
Okay. Back to this PSA about tax loss harvesting [00:03:00] with Zac McClure from Token Tax. Enjoy.
Zac: So anyone who lost money investing in crypto, which is pretty much anyone who bought toward in the end of 2017 or anytime in 2018, there is actually a silver lining here in that if you realize that loss, you can get back a chunk of the money from the IRS. And this is called tax loss harvesting. Any asset that you’re holding at an unrealized loss, which means you haven’t sold it yet to realize and lock in that loss, you can [00:03:30] sell to realize the loss. So when you do that, a lot of people do it toward the end of the year when they figure out, “All right. I owe a lot of taxes for all the gains I made in 2018 in stocks. So let me take a look at my stock portfolio and sell any that I’m holding at an unrealized loss to try to offset some of these gains in 2018 to reduce my tax liability.”
And so it’s very common. Anyone who has a private wealth manager or any savvy stock investor or whoever works at a hedge fund has been doing tax loss harvesting for decades on their stocks and their [00:04:00] bonds. And we can do it in crypto too. In crypto, not that many people know about it, understand it, and so we’re here to just give some information about what’s allowed, how much you can deduct against your ordinary income if you’ve already used up all your gains, what are the deadlines, when does any of this have to be done, can you carry it back to block taxes on gains paid in previous years.
First off, when you sell crypto [00:04:30] that you’ve been holding at a loss, you realize the loss, and you build this up. So let’s say I bought one Bitcoin for $10,000 in January 2018. So I didn’t hear about tax loss harvesting, didn’t get it done by the end of the year, but it’s actually okay. If you already had some other losses in other things on crypto, maybe some other Altcoins you sold, maybe you’ve already maxed out your $3000 ordinary loss for 2018. In that case, it doesn’t matter if you harvest [00:05:00] the losses before end of 2018 or at the beginning of 2019, it’s all the same. It all gets added to the same tax loss carry forward pool.
So we have our example. You bought a Bitcoin for $10,000. Today, early January, it’s worth $3500. So if I sell it, I’ll have a $6500 loss that I can use to offset on any other gain. Let’s say I bought some Ethereum three weeks ago and it shot up and I made 40%. I bought it at $100, now it’s at $140. [00:05:30] Well, I can sell. Let’s say I have a $5000 gain on that Ethereum, I won’t owe any taxes, even though it’s a short term gain, because I have this long term loss on the Bitcoin of $6500.
What’s the significance of $3000? A lot of people are confused and think, “I’ve already used up all my gains. What’s the good in harvesting losses? All I did was loss money.” And the answer is you can actually offset $3000 of income from anything else with losses in investing, and this isn’t just crypto but it’s [00:06:00] also stock. So if you made money as a librarian, you made $50,000 last year, and you lost $8000 in crypto. Well, if you realize that loss, you can offset $3000 of that ordinary income. So now you’re paying taxes, reporting to the IRS only $47,000 in income instead of $50,000. That remainder, the extra loss, that just carries forward forever until you use it up on your capital gains, which could be on anything, on real estate, [00:06:30] on stocks, bonds, other crypto, or it just carries forward with you for years until you use it up, offsetting $3000 of ordinary income anytime.
And there are a lot of great creative things you can do with these tax loss carry forwards. We’ve seen a lot of people in the crypto space who lost money in the 2008 financial crisis in stocks, and they had a big tax loss carry forward. They were using up $3000 per year until 2017. Maybe they had $100,000 still carrying forward, but then they had the opportunity [00:07:00] to make short term gains, to lock in profits that they’d normally be taxed at 50% on, which is the short term capital gain marginal tax rate for a lot of people, especially high earners. Some people in California might be paying even 55% on their short term capital gains. But because they have this big $100,000 capital loss carry forward, they can use that up first. So it gives them an opportunity to say, “All right. I’m not sure if I believe in this project anymore. I bought it three months ago. I’ve made an $80,000 [00:07:30] gain in three months because it just rocketed up. I’m going to sell it, and even though the taxes would normally be huge, I have this capital loss carry forward I can use to block taxes.”
So that’s why even if you’ve missed the deadline and you can’t do it for 2018, there’s a good reason to harvest your tax losses now in January, February, March. As long as the market moves sideways, if you’re holding anything at an unrealized loss. In other words, if you paid more for it than it’s actually worth today, you can sell it, lock in that loss, [00:08:00] and you can actually buy it back in 30 days if wash-sale rules apply. There’s been a lot of debate in the crypto community. And wash-sales mean if you recognize a loss on your stocks or other securities or bonds and you buy back the exact same stock within 30 days, that loss is disallowed. Now, it’s not clear if that rule applies to crypto or not. The IRS hasn’t said anything other than crypto is not a currency back in 2014 when they said every transaction has to be included, no matter [00:08:30] how small. There’s no de minimis exclusion or anything.
So I’ve seen a lot of people saying on Twitter, “Oh, wash-sale rules don’t apply.”
Clay: Hey, this is Clay cutting in here from the editors booth to help define what a wash-sale is. A wash-sale occurs when an individual sells or trades an asset at a loss and within 30 days, buys the same or substantially identical asset. Because of the wash-sale rule, the loss can be disallowed for current income tax purposes. Okay. [00:09:00] Back to Zac.
Zac: I think that’s a bit of an extreme statement. We don’t know. But the truth is if you wait 30 days, you’re totally safe. And something else you can do, if you’re worried about being out of the market for that 30 days, let’s say you’re holding Ethereum at a big loss or let’s say you’re holding an Altcoin at a big loss. Let’s say you have ZRX and you’re holding it at $20,000 loss, but you don’t want to sell and just be in dollars because what if it rockets up within the next 30 days. What you can do is sell that ZRX and buy a correlated cryptocurrency. [00:09:30] There are price databases out there that show you correlations, Nomic has one. They show you the coin correlations, and you could buy a crypto that’s strongly correlated with the one that you’re selling.
In most cases, Altcoins are very strongly correlated with Ethereum if you don’t want to do the research or don’t want to come talk to a professional about what crypto is correlated with the crypto you’re trying to sell. But for most Altcoins, if you sell it, realize the loss, and buy Ethereum, you’re going to get 90-95% of the upside if the crypto [00:10:00] market moves anyway.
Bitcoin, if you’re holding Bitcoin at a loss, you could sell it for Bitcoin cash. There are a lot of ways you can figure out the correlation between coins, and that way you get to realize your loss and you don’t have to buy it back immediately. I think when the IRS is looking at someone who sold crypto, sold something at a big loss, and immediately buy it back. I’m not sure if that passes the smell test or not. But I would say what I’m doing for my own trading is better safe than sorry. I’ll buy a correlated asset, [00:10:30] wait 30 days, and if I want to reenter that position, that’s what I would do.
I know a lot of people wonder, “Hey, I paid a huge amount of taxes in 2017. I reported a lot in gains, then I loss a ton of money in 2018. Can I carry back my losses to block those taxes retroactively?” And unfortunately, individuals cannot do this and companies cannot either anymore. There used to be rules about carrying losses back for companies that have changed now. But basically your losses carry forward forever, but that doesn’t mean that you shouldn’t realize [00:11:00] them. It’s almost a free lunch to realize these losses and just have them in your back pocket as a future blockage of any capital gain. You want to figure out how much money you’ll save my doing this. Figure out what your marginal tax rate is on your income. If you make $200,000 a year, you live in New York City, and your marginal tax rate is close to 50%, well realizing these losses and offsetting $3000 of ordinary income. It’s literally $1500 back in your pocket from the IRS, and there’s no reason not to do it.
Clay: Well, there you have it. [00:11:30] If your portfolio has plummeted significantly since you first bought a crypto asset, tax loss harvesting may be something worth looking into. Thanks to Zac from Token Tax for sharing this information with us. See you soon on our next episode, which comes out one week from today. Take care.