Crypto Tax Loss Harvesting

Tax loss harvesting is a simple but powerful way to use market losses to lower your tax bill, and it starts with a clear idea of what a capital gain is and what ordinary income is. Ordinary income is what you earn from activities like staking, lending, or receiving airdrops, and it is taxed when you receive it. Capital gains appear when you sell an asset for more than you paid for it, and the taxable amount is the difference between the sale price and your cost basis. The cost basis is just the original amount you paid for the tokens plus any fees you incurred. How long you held the asset matters too, because assets held longer than one year typically get a more favorable tax rate than those held for a shorter time. Tax loss harvesting works by selling an asset for less than your cost basis so the loss becomes "realized." Realized losses can offset realized gains, lowering the tax you owe on profitable sales. If your capital losses exceed your capital gains in a tax year, you can use a limited amount of the excess to reduce ordinary income for that year, and any remaining losses can be carried forward to future years. Timing is crucial because a loss only affects the tax year if you realize it before the last day of that year. To use tax loss harvesting well you must keep good records of purchase dates and cost bases, and you must track each trade across all your wallets and exchange accounts. Many crypto tax tools can gather transactions, calculate short and long term gains, and point out harvest opportunities, but the final choices are yours. Be careful about repurchasing the same or very similar assets right away, since rules about that practice can change and could affect whether your loss is allowed. Tax rules can be complex and change often, so consider getting advice from a tax professional who understands digital assets. In a volatile market, losses are not just setbacks; they can be tools that reduce taxes and smooth out gains over time, but only if you recognize those opportunities and act before the year ends.