Understanding the tax consequences of selling cryptocurrency is an important aspect for cryptocurrency investors.
The sale is a key event which crystallises a taxable gain or loss.
Until the sale, the gain/loss is “on paper” (or online), telling you how much your token is worth; this is known as an unrealised gain or unrealised loss.
This article outlines further information about cryptocurrency tax loss harvesting, along with examples and a strong warning for individuals who apply this technique.
Cryptocurrency tax loss harvesting applies to cryptocurrency holders or investors; it does not apply to cryptocurrency traders. Read further here about what differences distinguishes a cryptocurrency trader from holder.
What is Tax Loss Harvesting?
Tax loss harvesting is when an investor “harvests” (realises) their loss positions by selling their tokens. The loss can be offset against other cryptocurrency gains, or an individual’s other income.
John purchased 1 ABC token for $2,000, and 1 XYZ token for $1,500. While holding these cryptocurrency tokens, ABC drops to $1,000 and XYZ rises to $3,000. John sells his XYZ token for $3,000.
Without Tax Loss Harvesting
Without harvesting his losses in ABC token, John has a $1,500 taxable gain ($3,000 sale price less $1,500 purchase price) from the sale of his XYZ stock. John pays tax on all $1,500 of this taxable gain.
With Tax Loss Harvesting
Rather than continuing to hold his ABC stock, John harvests his losses in ABC by selling before the end of financial year. Cryptocurrency gains and losses are combined in the individuals tax return resulting in either a net gain or loss.
John’s net gain is now only $500 for the year ($1,500 – $1,000). In this scenario, John would only pay tax on $500 of net realised gains rather than $1,500
The sale of a cryptocurrency token at a loss will trigger a taxable event (harvesting) enabling those losses to become tax deductible.
Trades and sales executed immediately before 31 March, for only loss-making tokens are likely to stand out in trading data and be subject to commercial scrutiny.
The sale of a cryptocurrency token (triggering a taxable loss) then immediately buying it back (at the lower cost value), without a commercial reasoning has elements of a tax avoidance arrangement.
A tax avoidance arrangement “means an arrangement, that directly or indirectly has tax avoidance as its purposes or effect… if the tax avoidance purpose or effect is not merely incidental”.
Continuing the example above, if John was to sell ABC token to realise a loss and then immediately repurchase the ABC token, there is unlikely to be a commercial reason for doing so. This represents a strong indication of a tax avoidance arrangement.
Be aware that NZ has different cryptocurrency tax regulation compared to other jurisdictions which may allow cryptocurrency tax loss harvesting.
How long to wait before buying back?
This question would suggest that the intention of the sale was for tax purposes only. Therefore, the time period is irrelevant. As outlined above, the 30-day wash rule (applied in the US) does not apply in NZ.
While cryptocurrency tax loss harvesting appears to be an effective method to reduce tax, we recommend:
- Each trade has commercial reasons for doing so (not only tax reasons)
- Have a strategy that is regularly monitored and reviewed
- Document what you are doing and why
- Strong caution is used for tax loss harvesting
We are Chartered Accountants who prepare financial statements and income tax returns that involve cryptocurrency. We also provide personalised tax advice to your individual circumstances.
This is only our interpretation and has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.