Crypto investors, particularly those who bought towards the top of the market in 2021, may find some salvation through a tax-saving strategy called “loss harvesting,” according to Koinly’s head of tax in Australia.

Koinly is one of the most widely used crypto tax accounting firms online. Australian tax chief Danny Talwar told Cointelegraph that while most retail investors are aware of their obligation to pay capital gains tax (CGT) when they make a profit, many are unaware that the opposite is the case. and that the losses can be used to reduce your general tax. bill by offsetting capital gains elsewhere:

“Most people are familiar with the concept of income tax. But what they’re not doing is realizing that they can recognize that loss on their tax return and then offset it against profit.”

loss crop

Loss-harvesting, also known as tax-loss harvesting or tax-loss selling, is an investment strategy in which investors sell, trade, spend, or even give away an asset that has gone into the red, also known as as “disposal”, allowing them to “take a loss”. Investors typically do so in the final weeks of the fiscal year, which in Australia is right now. Talwar notes that the strategy works in many jurisdictions with similar CGT laws, including the United States.

“Countries like the UK, US and Canada either follow very similar capital gains tax regimes to Australia or have some kind of loss cropping,” he said.

The concept is also adopted by traditional investors in stocks, bonds and other financial instruments. In the world of cryptocurrencies, a loss can be made by converting it to fiat currency or simply exchanging it for another cryptocurrency token on the exchange.

Talwar believes that the rise of new crypto investors in recent years has likely produced a large number of losing portfolios, given the current bear market:

“A lot of cryptocurrency investors entered the market around 2020 and 2021. What that means is that most of these people will actually have losses, so their portfolios are in the red.”

It will work?

Talwar noted that there are specific nuances in each country’s tax regime, such as the treatment of “dummy sales,” that could affect an investor’s ability to benefit from tax loss harvesting, and suggested that investors contact their counters to see how best to execute this strategy.

“A bogus sale basically means you’re selling the same asset and buying it back in the same amount of time, just to recognize a loss for your tax return.”

This is illegal in some countries or the tax authority could deny the claimant the realization of a tax loss.

Koinly has published a guide explaining how the rules related to wash sales can differ from country to country.

As a general rule of thumb, Talwar suggests that anyone with a portfolio in the red should think about recouping losses:

“The bottom line is that if you made a sale during the tax year and you sold it at a loss, basically there is a benefit that people could miss out on if they don’t include it on their tax return.”

An “extreme exception” to the case would be if an investor’s portfolio only contains losing crypto and nothing else. In that case, they will not have any profit to offset.

Related: Taxes are the main concern behind Bitcoin salaries, says Exodus CEO

“They should talk to their accountant. Do they have other assets that they can offset a lot against? You know, there’s no point in taking a loss if crypto is your only investment, you have 99.8% of your savings in the bank and you’ll never invest again.”

Tax authorities catch up

Talwar believes that while global tax authorities have made great strides in the past three years to keep up with the rapidly evolving crypto industry, there is still much to be done as more retail investors flock to the market and the accessibility of crypto continues to increase:

“Three years ago, it was rare for a tax authority to have any kind of guidance on cryptocurrencies. And, the crypto space three years ago is a completely different beast than it is now. It has become much easier to buy and sell cryptocurrencies for everyday investors.”

However, Talwar noted that “not many” tax authorities have yet released guidance on how investors can register and report the use of decentralized finance (DeFi) protocols even though it gained strong adoption in 2020.

“The UK is probably leading the way in some respects because they just released guidance on decentralized finance. Not many tax authorities have published guidance on DeFi.”

This post Portfolio in the red? How Tax Loss Collection Can Help Stop the Pain

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