Why Selling Some Bitcoin at a Loss ? Complete Guides 2024

How to sell Loss your bitcoin for tax advantages without interrupting your strategy to hold for the long term. In my latest conversations with private clients, the number one question I get asked is about tax loss harvesting (TLH). TLH is best thought of as purposefully selling an investment you bought that is currently below your purchase price to lock in a capital loss on your taxes.

Due to bitcoin’s regulatory classifications, there is a unique way to take advantage of tax loss harvesting that isn’t possible with equities! One quick note, the following discussion of TLH strategy is solely based on U.S. tax laws, and this practice may or may not be possible in other jurisdictions.

What happens if you don’t have enough eligible capital gains and ordinary income to use your entire capital loss? You can actually roll forward the capital loss to the next year – indefinitely. This means that even if you don’t expect capital gains this year, but know you will have some capital gains in a future year, you can still take advantage of any capital losses this year to mitigate future tax events.

On a basic level, all that is required is a sale and repurchase of the bitcoin position. However, there are several other considerations to keep in mind.

Choosing an accounting method

Bitcoin investors can select three different accounting treatments for their bitcoin. These are Specific ID (HIFO, or highest in, first out), last-in first-out (LIFO), and first-in first-out (FIFO). Each of these methods refers to the question of “which” bitcoin was sold when an investor sells BTC.

For example, if someone had purchased 1 BTC on two different occasions and they then sell a bitcoin – which bitcoin was it that they sold? The one they bought at $10,000 or the one they bought at $60,000. You can see this obviously makes a big difference.

• FIFO: Any bitcoin sold is sold chronologically in the order in which they were purchased. The first bitcoin purchased is the first bitcoin sold. This method is generally best for people who started buying bitcoin when prices were high and kept buying as they fell.
• LIFO: Any bitcoin sold is sold in reverse chronological order. This method is generally best for people who started buying when prices were low and made their last purchase when prices were high.
• Specific ID (HIFO): Specifically select lots that are the highest cost and sell those first. It will usually allow the investor to lock in the largest capital loss possible regardless of when coins were purchased.

Why tax loss harvest your bitcoin?

Generally, the reason most people would take advantage of performing a TLH transaction is that they have some portion of their total bitcoin which is down more than 20%. Someone who is sitting on an unrealized capital loss of this magnitude or more, and who expects capital gains at some point in the future could benefit from taking advantage of the current low prices to lock in tax benefits for this year, or future years.

Even if you don’t expect much in terms of capital gains anytime soon, the income deduction could also be one reason to perform a TLH transaction. This is particularly relevant for people who plan to hold their bitcoin for a long time, and potentially borrow against the bitcoin in the future instead of selling it.

If your goal is to sell your bitcoin quickly for a profit, you will end up resetting your cost basis when you do a TLH transaction which will net out any benefits accrued. However, if you have a longer investment timeline locking in losses today can be a good idea.

What is bitcoin tax?

Bitcoin tax refers to the taxes you owe on any gains or income you generate from your Bitcoin activities. Tax authorities like the IRS in the US consider Bitcoin and other cryptocurrencies as property, similar to stocks or bonds. This means you generally have to pay taxes when you dispose of your Bitcoin at a profit.

Here’s a breakdown of the main scenarios that trigger Bitcoin taxes:

• Selling Bitcoin for a Profit: If you sell your Bitcoin for more than you bought it for, you’ll owe capital gains tax on the profit. The specific tax rate depends on how long you held the Bitcoin before selling (short-term or long-term) and your taxable income bracket.
  • Short-term capital gains (held for less than a year) are typically taxed at your ordinary income tax rate.
  • Long-term capital gains (held for more than a year) may benefit from a lower tax rate compared to short-term gains.
• Using Bitcoin to Buy Goods or Services: If you use your Bitcoin to directly purchase goods or services, you may owe taxes on the difference between the price you paid for the Bitcoin and the fair market value of the goods or services at the time of purchase.
• Receiving Bitcoin as Payment: If you receive Bitcoin as payment for your work or services, it’s considered income and is taxed at your ordinary income tax rate.
• Mining Bitcoin: If you mine Bitcoin, the rewards you receive are generally considered ordinary income and taxed accordingly.

Here are some additional things to keep in mind about Bitcoin taxes:

• Reporting Requirements: You’re generally responsible for reporting your Bitcoin transactions on your tax return, even if you don’t receive a 1099 form from an exchange.
• Keeping Records: It’s crucial to maintain good records of your Bitcoin transactions, including the date of purchase, sale price, fees, and any other relevant details. This will help you accurately calculate your capital gains or losses and report them correctly on your tax return.
• Tax Complexity: Crypto tax rules can be complex and vary depending on your location. Consulting with a tax professional familiar with cryptocurrency is recommended to ensure you’re compliant and minimize your tax burden.

Selling some Bitcoin at a loss to maximize your hodling potential is a strategy called tax-loss harvesting. It leverages tax rules to potentially reduce your tax burden and free up capital to buy more Bitcoin (or other assets) in the future. Here’s how it works:

• The Basic Idea: When you sell Bitcoin for a profit, you generally owe capital gains taxes on that profit. However, if you sell Bitcoin for a loss, you can offset those losses against your capital gains from other investments. This can lower your overall tax liability.
• Maximizing Hodling Potential: By reducing your tax burden through tax-loss harvesting, you free up more capital that you can then use to buy more Bitcoin. This allows you to potentially increase your overall Bitcoin holdings over time (hodling refers to holding onto an asset for the long term).

Here are some things to consider when using this strategy:

• It only works if you have Bitcoin at a loss: This strategy relies on having Bitcoin that you purchased at a higher price than the current market value.
• Tax implications can vary: Tax laws and regulations regarding cryptocurrencies can vary depending on your location. Consulting with a tax professional familiar with crypto is recommended to ensure you understand the tax implications in your specific situation.
• Wash sale rules: Tax authorities often have wash-sale rules in place to prevent people from artificially generating tax losses. These rules typically state that if you repurchase the same asset (in this case, Bitcoin) within a short period after selling it at a loss, the loss on the sale may not be tax-deductible.

Overall, tax-loss harvesting can be a valuable strategy for maximizing your hodling potential, but it’s important to understand the tax implications and relevant regulations before implementing it.

How to Reduse Bitcoin Tax?

Here are some strategies you can explore to potentially reduce your Bitcoin tax burden:

Tax-Loss Harvesting: As mentioned previously, this strategy involves selling Bitcoin at a loss to offset capital gains from other investments, lowering your overall tax liability. You can then use the freed-up capital to buy more Bitcoin (be mindful of wash-sale rules).

Hold Your Bitcoin Long-Term: In many jurisdictions, capital gains taxes are lower for long-term holdings (over a year) compared to short-term ones. By holding your Bitcoin for more than a year before selling, you may qualify for a more favorable tax rate.

Strategic Selling: Consider planning your Bitcoin sales around your income. If you expect to be in a lower tax bracket in a future year, you might hold off on selling until then.

Spend with Bitcoin Strategically: If you must spend Bitcoin, try to do so when the price is close to your purchase price to minimize capital gains.

Offset Gains with Bitcoin Donations: Donating Bitcoin to qualified charities can be tax-deductible, reducing your taxable income.

Minimize Trading Activity: Frequent buying and selling can generate more taxable events. Consider a hodling strategy or limit trades to reduce taxable events.

Use Crypto Tax Software: Keeping track of your Bitcoin transactions can be complex. Crypto tax software can automate the process and ensure accurate records for tax filing.

Consult a Tax Professional: Crypto tax regulations can be intricate and vary by location. Consulting a tax professional familiar with cryptocurrency can help you develop a tax-efficient strategy for your specific situation.

Here are some additional points to remember:

• Record Keeping: Always maintain good records of your Bitcoin transactions, including the date of purchase, sale price, and any fees incurred.
• Stay Updated: Cryptocurrency tax rules are constantly evolving. Staying informed about the latest tax regulations can help you make informed decisions.

Remember, these are general strategies, and it’s important to consult with a tax professional to get advice specific to your situation and location. They can help you determine the best approach to minimize your Bitcoin tax burden while staying compliant with tax regulations.

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