Failing to utilize tax loss harvesting is one of the biggest mistakes people make on their tax returns, according to Danny Talwar, the head of tax at crypto tax software firm Koinly.
Speaking to Cointelegraph ahead of the April 18 United States tax deadline, Talwar said that for those investors who experienced losses in the market over 2022, this is the last chance to report the loss and “try and get some of that benefit” by offsetting it against any gains made in the previous year.
Tax-loss harvesting occurs when an investor sells at a loss to offset the amount of capital gains tax owed from selling profitable assets.
“It’s probably the biggest mistake people make, not realizing they can use tax loss harvesting,” Talwar said.
“A lot of people might think, ‘oh, I’ve not made any money on crypto, so it’s not taxable this year,’ but you can actually get that benefit. So that’s probably one of the biggest strategies people can use.“
However, he also noted that to claim a loss, you “have to have realized the loss in some way.“
“The IRS was quite clear that you can’t claim a loss on something if its value has gone down and you haven’t actually sold out of it.“
Talwar says to be mindful that tax loss harvesting can lead some to commit a “wash sale,” which is an Internal Revenue Service (IRS) regulation that prevents an individual from selling or trading stock or security at a loss, then buying the same asset within 30 days of the sale.
As digital assets have not been classified as securities, crypto is currently not under these same rules; however, U.S. President Joe Biden’s upcoming budget proposal has proposed a crackdown on crypto wash sales.
“Rules can change very quickly, and they can change retrospectively. So you really have to watch out as you have to understand the risks.”
Talwar said the IRS may still investigate whether a transaction was genuine “if you’re doing something just to get a tax benefit.“
“I wouldn’t be encouraging people to do it, but at the same time, people are doing it.“
“The IRS actually came out and clarified the approach on that because people were wondering whether they could claim losses on things like FTX or even rug pulls,” he said.
Ultimately, Talwar says, “the best strategy is to actually pay tax” and get professional advice ahead of tax season. Talking to an accountant can help uncover “what reliefs and benefits are available.”
“Obviously, using an accountant can help to navigate any of that complexity or challenge around what to do.“
For those that don’t have their documents ready, Talwar says there is the option to file for an extension, but they’ll “still have to pay the taxes by April 18.“
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.