Crypto tax-loss harvesting guide

Crypto taxes are complicated and boring, but you have to do them. The good news is that there are things you can do, like tax-loss harvesting, to minimize your tax bill. We'll explain what tax-loss harvesting is and when it might be the best choice for you, so sit back and relax. However, you should probably speak with an accountant for specific tax questions. This isn’t meant to be taken as financial advice, and your tax situation will be specific to your own finances.

Pro tip: never take tax advice from a cocktail-themed company without also talking to a professional.

At the end of the day, if you’re planning to use your crypto and on-chain assets to pay bills or off-ramp directly to your bank account, there are some key things to know about tax-loss harvesting and how it can actually benefit your bottom line come tax season.

What is tax-loss harvesting with crypto?

Tax-loss harvesting is the process of strategically selling assets in your investment portfolio in order to realize losses that can be used to offset capital gains and reduce your tax bill. For example, let's say you bought a bunch of $DOGE for $1,000 and it's now worth $500, which isn’t too bad of a loss for $DOGE! If you sell that asset by off-ramping to your bank account or using it to pay off some bills, you'll have a $500 capital loss that you can use to offset any capital gains you may have realized elsewhere in your portfolio.

The crypto market had some big wins and some even bigger losses this year. Unless you got in at the perfect time, you likely have some losses that you can offset. Using these losses to your advantage can help lower your overall tax bill if you also had some major gains. Pay off your credit card with crypto, or sell some crypto at a loss to lower your tax bill and then invest it elsewhere.

Tax-loss harvesting can also be done quarterly if you file taxes on a more frequent basis, so if you’re a frequent trader, figuring in potential gains into your strategy can help you identify good times to offload losses in order to balance out your income during the tax process.

How to use tax-loss harvesting to your advantage:

Before you start tax-loss harvesting with crypto, you'll need to keep track of all your crypto transactions, including the date of each purchase, the price you paid, and the amount you sold for. This will help you determine your capital gains and losses.

You'll also need to be mindful of the wash sale rule, which prohibits you from claiming a loss on the sale of a security if you buy the same (or substantially identical) security within 30 days before or after the sale. This rule applies to crypto assets as well, so be sure to avoid buying and selling the same assets within a short period of time if you want to take advantage of tax-loss harvesting. We’re just trying to help you out. Friends don’t let friends commit tax fraud.

How to lower your crypto taxes and pay your bills with crypto at the same time:

Selling some of your crypto at a loss can feel painful, but if it’s helping you avoid a larger tax bill it will balance itself out. Consider selling some of your crypto at a loss through Spritz in order to pay off some bills and lower your tax responsibilities in a single transaction. When you use Spritz, the transaction counts as a crypto sale, so you may as well streamline the process by using the cash you get from selling your crypto to pay bills in a single transaction.

You can also use Spritz to off-ramp crypto into your bank account directly from your wallet. The holidays are upon us, so use that extra crypto to enjoy the final days of the year with some extra cash in your checking account. Using Spritz to pay bills with crypto or off-ramp crypto to your bank account is a great way to take advantage of tax-loss harvesting while completing a few financial tasks from your to-do list as well. Sign up for the Spritz app here to get started.

Finally, be sure to consult with a tax professional before implementing any tax-loss harvesting strategies with your crypto portfolio. They can help you navigate the complexities of the tax code and ensure that you're making the most of your crypto gains and losses—and make sure that you’re not breaking any laws.

Tax-loss harvesting with crypto can be a powerful tool for minimizing your tax bill and maximizing your profits. By carefully tracking your transactions and working with a tax professional, you can effectively harvest your losses and keep more of your hard-earned money. Just keep in mind, you’ll need to complete any transactions before the end of the year in order for it to count toward this tax season.

Happy harvesting!