What is Tax Loss Harvesting?
Tax Loss Harvesting (TLH) is a strategy that can help you reduce capital gains taxes. Tax loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses.
The result is that less of your money goes to taxes and more may stay invested and working for you. This is done by strategizing investment losses to offset capital gains you may have had in other positions, such as stocks or securities and/or offset ordinary income. You will most likely want to REALIZE enough capital losses in crypto to OFFSET your capital gains in stocks or other places.
Even if you don’t anticipate any capital gains this year, there are still benefits to the tax loss harvesting strategy because capital losses can be used to offset ordinary income up to $3000 dollars. In addition, losses can also be carried into the future and used to offset future gains.
How to make tax loss harvesting part of your year-round tax and investing strategies:
The best way to maximize the value of tax loss harvesting is to incorporate it into your year-round tax planning and investing strategy. You can take strategic advantage of dips in price and have your crypto investments work more efficiently for your portfolio. It is recommended that instead of only offsetting your capital gains at the end of the year, you do so on a regular basis throughout the year
The deadline for realizing losses on your crypto is December 31st. You will need to sell your crypto at a loss within the calendar year if you want to harvest those losses to offset other gains you will have to pay the IRS this year. Check out the video our CEO created to help you with this year’s Tax Loss Harvesting!
ZenLedger's Tax Loss Harvesting Tool:
ZenLedger's Tax Loss Harvesting tool lets you know how many unrealized capital losses you have in each token. Once you see this preview, you can then decide if you want to realize the loss. You can decide which token(s) you want to realize the loss on, and by how much.
To ensure accuracy, before you use our Tax Loss Harvesting tool, please make sure all of your wallets and exchanges are imported and up to date. If you need help with this, please reach out to our support team.
Step-by-Step Instructions on How to Use the Tax Loss Harvesting Tool:
Step 1: Click on the Taxes tab at the top of your screen.
Step 2: Scroll down to the Utilities box on the right side of the page, and select Tax Loss Harvesting.
Step 3: Generate and open the report (it will open as a Google Spreadsheet in a new tab of your browser).
Reading the Results of your Tax Loss Harvesting Spreadsheet:
Each tab in the spreadsheet represents your unrealized capital loss. The first two tabs are summaries of your total potential losses to harvest, organized by currency. You can toggle between LIFO and FIFO accounting methods in the spreadsheet. There will be a difference between the two as described below.
Tab 1: Summary by FIFO
This tab summarizes your losses as accrued by using the FIFO accounting method (more widely recommended by tax experts). Please note: You must be consistent year to year and between your tax loss harvesting and your reporting on your 8949 or Schedule D. You cannot switch between these, you have to chose one and stick with it.
Tab 2: Summary by LIFO
This tab summarizes your losses as accrued by using the LIFO accounting method. Please note: You must be consistent year to year and between your tax loss harvesting and your reporting on your 8949 or Schedule D. You cannot switch between these, you have to chose one and stick with it.
Tab 3: FIFO Ordering of Sells
This table shows you all of the coins you currently own that have an unrealized loss using the FIFO Accounting method. This is the raw data we use to create your summaries on tab 1 and 2.
Tab 3: LIFO Ordering of Sells
This table shows you all of the coins you currently own that have an unrealized loss using the LIFO accounting method. This is the raw data we use to create your summaries on tab 1 and 2.
Realize Losses by Selling Your Crypto
Once you see where you have losses to harvest, it’s up to you to take action. You can share this data with your tax professional so the two of you can decide on the best approach, or login to your exchange(s) and sell your coin(s) yourself.
You can choose if you want to realize any or all of your capital losses in crypto, or just enough to offset your non-crypto capital gains and $3,000 in income taxes. The ZenLedger Tax Loss Harvesting Tool tells you what coins have unrealized losses, but we do not direct you to an exchange or wallet to sell from. This is because all your coins are in the same “accounting” bucket.
This information is for informational purposes only and not for the purpose of providing financial, legal, investment, accounting, or tax advice. You should contact your CPA or other qualified tax professional to obtain advice regarding your particular issue or problem.