According to the head of tax for Koinly in Australia, investors in cryptocurrencies, particularly those who purchased in near the market’s peak in 2021, may be able to find some rescue through a tax-saving approach known as loss harvesting.
This is the opinion of Koinly’s head of tax in Australia. Koinly is one of the crypto tax accounting firms that is used the most frequently on the internet.
Danny Talwar, the head of tax in Australia, told Cointelegraph that while the majority of retail investors are aware of their responsibility to pay capital gain taxes (CGT) when they make profits, many are unaware that the opposite is also true and that losses can be used to reduce an individual’s overall tax bill by offsetting capital gains elsewhere.
What is meant by the term Loss Harvesting?
Loss harvesting, also known as tax-loss harvesting or tax-loss selling, is an investing technique in which investors “realise a loss” by selling, exchanging, spending, or even gifting an asset that has slipped into the red.
This action is also known as making a “disposal.” So’s common practice for investors to do it in the last few weeks of the tax year, which in Australia is happening right now.
Talwar observes that the method is successful in a number of jurisdictions with CGT rules that are comparable to those of the United States.
Traditional investors in stocks, bonds, and other financial instruments are also on board with the notion.
In the world of cryptocurrencies, a loss can be incurred either by exchanging it for fiat currency or by trading it in an exchange for another cryptocurrency token.
Given the current state of the cryptocurrency market, Talwar thinks that the recent influx of new investors over the past few years has undoubtedly resulted in a significant number of portfolios that have experienced a loss.
Loss harvesting will work or not?
The treatment of wash-sales under each country’s tax regime, according to Talwar, could affect an investor’s capacity to gain from tax-loss harvesting.
He advised investors to consult with their accountants to determine how to best implement this technique. This is prohibited in some nations, otherwise, the tax office may deny the claimant a tax loss.
Koinly has released recommendations describing how to wash selling regulations can vary from country to country. As a general rule, Talwar believes that anyone with a negative portfolio should consider loss harvesting.
One exception to the rule would be if an investor’s entire portfolio consisted of losing cryptocurrencies. In such a scenario, they will have no profits to counterbalance.
Attempts by tax officials to catch up:
Talwar feels that although global tax authorities have made great steps in the past three years to keep up with the rapidly evolving crypto business, they still have a lot to learn as more individual investors enter the market and crypto accessibility keeps rising.
Nevertheless, Talwar observed that “few” tax authorities have yet issued guidance on how investors can record and report the usage of decentralised financing (DeFi) protocols, despite the fact that its adoption is expected to be widespread in 2020.