Is anyone here into Tax Loss Harvesting? It's a technique for rolling over losses that can help offset future capital gains. But honestly, I can't really see why it's better than just holding on to your crypto.
Take a look at this first scenario No Tax Loss Harvesting:
Buy 1 BTC for $60K.
Sell that 1 BTC for $180K three years later.
With a 30% tax rate, you'd be looking at a capital gain tax (CGT) of 0.3 times $120K, which comes out to $36K.
Now, Example 2 Tax Loss Harvesting:
You buy 1 BTC at $60K.
Then swap that 1 BTC for 1 WBTC (Wrapped BTC) when it’s down to $30K six months later.
With the same 30% tax rate, that's a capital loss of 0.3 times $30K, totaling $9K. You can use this loss to offset your future gains.
Fast forward three years, you sell 1 WBTC for $180K (since WBTC is linked to BTC, the prices stay the same in USD).
Again, with the 30% tax rate, the calculation would be CGT = 0.3 times $150K minus $9K, resulting in $36K.
So in both examples, the outcome ends up being the same. What's the advantage of tax loss harvesting? Can anyone shed some light on this using these examples?
I am not sure of your calculation if correct or not as I did not look into it, what you are implying is that capital loss can be a benefit while gaining back your lost asset. If so, yes, you are right because the whole losses will be gained back before taxes can be paid which will be after net capital gain. But, still, the fact still remain nobody want to lose.
If all you did was buy a coin, their is no capital gains tax,
you have to sell , and if you sell in the 1st year, it is counted as income.
Tax loss harvesting only make sense in the following scenario,
say you owned Doge coin at below 1 cent and it went to 32 cents,
so you sold most or all of it, cash out a bunch and reinvested into other crypto like BTC or whichever at near peak price.
Now if the price holds near peak , no point in doing anything,
however if the price of the other coins you reinvested in crash before year end, then selling in December, and re-buying in January would lower 2021 capital gains taxes by locking in the losses, and lowering your gains.
Now when you rebuy in Jan 2022, your new cost basis will take effect, but you don't really have to worry about it until their is a new peak, which may or may not be in a few years. If it is, you can pay the extra tax from the increased gains, if not at least you lower your original tax bill. * Note their is no guarantee, tokens or btc will survive to a new peaks. *
But like I said earlier, if you have no big gains, their is nothing to offset.
FYI:
The big gains you are trying to lessen don't always have to be from crypto,
if you have a really large income or did really well in stocks,
you might want to use Tax loss on crypto to help offset those wins and lower your taxes.
As above poster said. There is no need of doing this if this is your only investment. As you calculated ... tax needs to be paid, there is no way to jump over it.
Its used only when other investments yeld high returns (Realized profit) and one investment is on big loss. It is worth to dump it and buy again to realize loss that lower profit from other investments = lower tax paid in this year.
Same works if you have loss on your realized investments and unrealized big profit somewere else.
With BTC/WBTC trade. Make sure that in your contry crypt to crypto trades counts for TAX calculation. In my country we compare only in and out of crypto (fiat to crypto buy vs fiat to crypto sell)
Tax-loss harvesting does not affect your gains. It only affects the accounting.
The purpose of tax-loss harvesting has nothing to do with the specific asset. It is simply a way to reduce your capital gains in a particular year for whatever reason you may want to do that.
Here is a specific example for the U.S.:
Suppose you sell asset A and have long-term capital gains of $500,000. The gains above $445,850 are taxed at 20%. If you sell another asset B for a loss of $54,150, then you will avoid the 20% tax. Later when you sell asset B (assuming that you bought it back), the gain will be greater than if you didn't sell at a loss, but it will be taxed below 20% if the gain is below $445,850. In short, you have reduced your taxes by spreading the gains out over two years.
A dollar today is worth more than a dollar tomorrow - you'd rather get your tax bills refunded earlier and have that liquid cash to play around with rather than having to wait until the asset goes up in however many years it takes for prices to recover and then realising that capital gain.
I think that's the main advantage.
There is no real "monetary gain" other than the fact that you get some liquid cash earlier that you can just put towards a savings account to pay off your CGT later on and some more.
Tax Loss Harvesting doesn't work this way. Basically, Tax-Loss harvesting works on the concept of kicking the can down the road. It works on the idea of realizing your losses to set them off with your current incomes. For example:
Year 2020: You bought 1 BTC for $10k
Year 2021: You sell 1 BTC for $60K
Gain in 2021: will be $50K
But suppose you have a position in Ethereum. Where you bought 20 Ethereum in 2021 for $4200. Now the position by the end of 2021 is worth $2000k. You sell the position
and suffer a loss of 20 x $2200: $44000 of loss. Immediately after the end of the year, you buy back your position again for $2200 only.
Now your loss of $44k can be set off against gain of $50k. Your net gain is just $6K. Tax rate assumd at 30% will make your tax just $1800. While it would have been $50k x 30% = $15K. You deferred $13200 of tax payments to next years, Now, Assuming the Interest Rate you will earn on this Money by reinvesting it is 10%
Thereby saving 10% of $13200 = $1320.
But yes obviously now you have brought Ethereum worth $2200 and whenever you sell it the buying price will be $2200. But what you have done is saved the Interest Costs of taxes on $44K by deferring it's payment into future years. It doesn't makes your investments tax free. Just delays your tax burden.