self
If you've ever invested in cryptocurrencies, you probably know the harsh reality of watching the market plummet right before your eyes. However, depending on your portfolio, there may be a silver lining to this market downturn. Virtual currency tax loss recovery You could potentially save thousands or even millions of dollars in taxes.
Cryptocurrency tax loss harvesting is a way to avoid capital gains tax
without it It will damage your portfolio. If you realize enough losses, you can also offset future capital gains.
Here's what you need to know about this powerful money-saving strategy.
What is virtual currency tax loss recovery?
Crypto tax loss recovery is a powerful way to save on taxes by offsetting capital gains with crypto losses.
Do you hold a cryptocurrency or NFT that has decreased in value since you bought it? Then you are sitting
unrealized loss. Crypto tax loss recovery allows you to realize these losses by selling certain assets at a loss and lowering your tax bill.
Crypto loss recovery has multiple benefits when used correctly. Depending on your holdings, you may be able to:
- Reduce your crypto capital gains (and associated taxes) to $0
- Offset other income on your tax return by up to $3,000
- carry forward losses into the future
The best part? Unlike stocks, You can buy back your crypto assets after 24 hoursTherefore, the impact on your portfolio is minimal.
Pro tip: When you sell and buy back crypto assets, the cost basis and acquisition date are reset. Keep this in mind if long-term holding is part of your crypto tax-saving strategy.
How will wash sale rules affect the recovery of virtual currency tax losses?
of wash sale rules (also known as the 30-day rule) limits the collection of tax losses on stocks and securities. The IRS says you must wait 30 days after selling stocks or securities before buying them back or you won't recognize the loss on the sale.
Currently, most digital assets are not legally defined as securities; exempt from wash sale rules. This means that if you sell a crypto asset at a loss and then buy back the same asset in a short period of time, you can still recognize the loss on your tax return.
The way digital assets are classified may change in the future as regulations evolve, so if you have any questions, please contact one of our cryptocurrency tax attorneys.
What are the tax collection limits for virtual currencies?
Unfortunately, there are some limits to the amount of losses that can be claimed on your tax return through cryptocurrency tax loss recovery.
The extent to which your crypto asset losses exceed your capital gains is your net capital loss for the tax year. The IRS only allows you to offset $3,000 of your capital loss ($1,500 for married couples filing separately) against other income on your tax return. However, any cryptocurrency losses in excess of $3,000 will be carried forward into the future to offset future gains.
Who can benefit from virtual currency tax loss recovery?
Any crypto investor with unrealized losses can take advantage of the loss harvesting of cryptocurrencies, but this strategy primarily serves investors in higher tax brackets.
Depending on your gross income, your tax rate on long-term capital gains may already be 0%. Based on your filing status, you may not actually save money by recovering your crypto losses if your taxable income in 2024 is less than:
- For single filers or married filers filing separately: up to $44,625
- Joint tax return for married couples: up to $89,250
- Head of household: up to $59,750
However, the effectiveness of cryptocurrency tax loss recovery depends on several factors, including total income and the combination of short-term and long-term profits. We recommend working with a cryptocurrency tax professional to conduct a custom analysis of your situation.
Storytime: Cryptoasset tax loss recovery example
Let’s look at some examples to understand the benefits of loss recovery for crypto investors.
Scenario 1: Tax savings realized over multiple years
One of our clients, “Jane”, asked us to review the opportunity to recover tax losses in the fall of 2023. She had previously earned $10,000 in capital gains. Although her profits were relatively small, Jane's total income was high, putting her in one of the highest tax brackets. She wanted to keep her bill as low as possible.
Gordon Law used our loss recovery tools to identify:
Potential loss is $287,000. We helped Jane identify exactly which coins to sell and for what amounts to maximize her savings.
Not only Jane abolish her capital gains tax But she also offset $3,000 of her other income (the maximum amount she can receive in a year). Even better, her losses can be carried forward, reducing taxes on future gains.
After 24 hours, Jane was able to buy back the cryptocurrencies she wanted to keep in her portfolio without damaging her long-term investment strategy.
Scenario 2: You missed out on $120,000 in savings.
Another customer, “Brian,” held coins that had lost $600,000 in value since purchase. Our accountant explains how Brian can cover his losses and Save $120,000 About capital gains tax.
But Brian waited too long…he didn't pull the trigger by December 31st. He paid an extra $120,000 in taxes that could have been avoided.
Don't be like Brian. Start early, consult a qualified crypto CPA, and take advantage of loss recovery before it's too late.
When should you take advantage of crypto tax loss recovery?
The deadlines for collecting losses are as follows: December 31stEvery year. Although most crypto investors wait until the last moment to harvest their crypto losses, we recommend starting in September or October.
If you are looking for more aggressive tax savings, Harvest cryptocurrency losses throughout the yeartake advantage of market declines. However, to maximize your chances of recovering your crypto tax losses, you should stay on top of your crypto tax reporting.
The most difficult thing for cryptocurrency investors is Identify which coins have the highest cost base compared to the current market price. Without this information, it is nearly impossible to use loss collection effectively.
By staying on top of your crypto tax reporting, you can track how much profit you've accumulated over the year, so you can determine how much crypto tax you need to collect to lower your tax bill. Our team will advise you to give you a better idea of how much cryptocurrency collection you need to make if you have carry forward losses from previous tax years.
Need help figuring it out? Contact our experienced cryptocurrency accounting team.
Pro tip: Get an early start with your taxes and complete your first crypto tax report by September or October of each year. This way, you will know which crypto assets to sell for the greatest tax benefits. Plus, filing your April taxes will be easier.
NFT tax loss recovery
NFTs create a great opportunity to recover tax losses. Perhaps your NFTs have become worthless because they had the rug pulled from them, or maybe they just lost value in a bear market. Either way, selling your NFTs and recouping your losses is a wise move to consider.
With some “valueless” NFTs, you may find it difficult to sell the asset. What if there are no buyers for my NFT?
Tools like Unsellable NFT and NFT Loss Harvestooor allow you to sell illiquid NFTs to realize a loss and reduce capital gains.
Avoid selling to yourself or to people in your social circle, as you may not be able to legally claim your losses. Look for buyers that have been audited and verified. And ideally, consult a tax professional to optimize your tax loss recovery strategy. Read our NFT tax guide to learn more.
Pro tip: Cryptocurrency makes it easy to sell assets and buy them back later. However, because NFTs are unique, there is a higher risk of permanent loss of your assets. Keep this in mind when considering recovering tax losses on NFTs.
The content of this article is intended to provide a general guide on the subject. You should seek professional advice regarding your particular situation.
