Loss Harvesting in the Era of the Bears

As we enter another month of bear markets, it seems like we can’t go a day without a tweet or video talking about loss harvesting or capitulation. We’ve talked about loss harvesting before, but it is something that in this market should be on the table for any long term or serious investor.  

Tax Loss Harvesting is when you sell assets that have more basis than what you receive for sale price. Those losses are then applied against any capital gains. Short term losses are first applied to short term gains, and long term losses to long term gains. So you should try to prioritize those losses that are short term first, as they will go against the highest taxes rate capital gains first. When you have losses that in excess of gains, you are limited to a reduction of ordinary income of $3,0000. So if you had $2,000 worth of short term capital gains in ETH and $10,000 of Loss in BTC, you would have a net loss of $8,000 which $3,000 would be applied to other income and $5,000 would carry forward to next year.

Here’s why it isn’t a cut and dry issue:

Timing

One thing that you have to balance is the timing between harvesting losses and maintain long term capital gains rates. By selling and buying back in/transferring to another coin you are restarting the one year and one day counter. If you don’t have gains to offset, it may not make sense if you are anticipating your tokens ever returning to the same value or greater. Those that have gains from the beginning part of the year may want to consider loss harvesting, those that have losses in excess of gains may want to hold the line for preferential rates and reducing basis overall.

State Loss Rules

Some states have tax laws that do not allow for loss carry forward for capital losses . Two of those States are New Jersey and Pennsylvania, who do not allow for losses to carry over. Some States like Alabama, do not cap your losses in the way that the IRS does which if you don’t have other income would waste the loss.

Wash Sale Rules

When you sell and then buy a “similar” stock within 30 days, the IRS may disallow the loss if they determine it to be without economic substance. Now this rule is applied to stocks specifically but as we have seen with the SEC’s recent enforcement of ICOs as securities, the lines are being blurred between security and utility tokens. While I believe that wash sale rules do not apply to cryptos, if you want to be safe you will want to repurchase into positions at the 31 day mark. This would not apply to the transfer from one coin to another. Going from Alts to ETH would allow you to harvest loss and rebalance a portfolio for the next bull run.

Dead Coins

You can only claim loss for tokens that you have sold, not just holding. If you are holding tokens with no liquidity or value, it would be a good idea to find a burn wallet or tip jar to transfer the tokens to in order to harvest the loss.

If you don’t already know where your portfolio is, it’s a good idea to figure out where your portfolio is for the year and take the appropriate actions to either lock in loss or rebalance the portfolio. Contact us if you have any questions or need help calculating your loss and preparing for the next bull run.