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Tax Loss Harvesting in Cryptocurrency

Tax Loss Harvesting in Cryptocurrency – Introduction, How it works and Things to keep in mind

What if you could take advantage of a fall in the value of the Cryptocurrency in your portfolio? Are you wondering how it is possible? Yes and it is called Tax Loss Harvesting!

Tax-Loss Harvesting in Cryptocurrency is an opportunistic way to increase your post-tax returns on investment. Even though an indirect way, tax-loss investing can help you maximise your gains.  

Tax Loss Harvesting: An introduction

Taxablity of investments in Cryptocurrency is similiar to capital gains taxation
Whenever you invest in Cryptocurrency, you make capital gains. These capital gains are taxable based on how long you stayed invested in that Cryptocurrency Pair. Tax-loss harvesting is used to reduce tax liability on investments. . In tax-loss harvesting, you sell your Crypto units at a loss to reduce your tax liability on capital gains.
 
It is a method to offset the capital gains made on Cryptocurrency against the capital loss suffered to pay a lesser amount of tax. You can employ tax-loss harvesting to reduce the tax liability on both Long Term Capital Gains and Short Term Capital Gains. Usually, investors use it for Short Term Capital Gains because the tax rates on short-term capital gains are higher than that of long-term capital gains.  

How does Tax Loss Harvesting work?

Most of the investors prefer using this strategy at the end of the financial year when they need to file returns. But you can use it throughout the year in a planned manner to keep your capital gains at a relatively lower level. Tax-loss harvesting starts with the sale of the Cryptocurrency or Crypto Pair which is experiencing a price decline. You feel that the security has lost most of its value and chances of a rebound are bleak. Once the loss is realised, you offset it against capital gains that your portfolio has earned over the period.
Let’s understand this with an example. Suppose in a given financial year your portfolio made an STCG and LTCG on Cryptocurrencies of Rs 1,00,000 and Rs 1,05,000 respectively. The short-term capital losses were Rs 50,000. Tax payable (Without tax loss harvesting) = [(Rs 100,000 * 15%)+{(105,000-100,000)*10%}] = Rs 15,500 Tax payable (With tax loss harvesting) = [{(Rs 100,000-Rs 50,000) * 15%)}+{(105,000-100,000)*10%}] = Rs 8,000. The calculations might seem pretty confusing and time-consuming. You can get assistance on managing and filing Cryptocurrency tax returns by contacting us. The amount realised from the sale of the loss-making Cryptocurrency can be used to buy a lucrative cryptocurrency. Among other measures, tax-loss harvesting is a vital tool to save a lot on taxes. Additionally, you get to know ways to diversify your portfolio to earn higher returns. It doesn’t help to nullify the losses, but it can reduce your suffering by helping you save taxes.  

Things to keep in mind while Tax Loss Harvesting

While setting off losses using tax-loss harvesting, you need to keep the following points in mind:
  • Long-term capital losses can be set-off against only long-term capital gains. You cannot set-off long-term capital losses against short-term capital gains.
  • Short-term capital losses can be set-off against either short-term capital gains or long-term capital gains.

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