Does anyone here engage in Tax Loss Harvesting? This is a method to bring forward losses, which can be used to offset capital gains later down the track. But I'm struggling to see the benefits vs just hodling.
Example 1 - No Tax Loss Harvesting
Buy 1 BTC at $60K
Sell 1 BTC at $180K three years later
Assuming tax rate of 30%, CGT = 0.3 * 120K = $36K
Example 2 - Tax Loss Harvesting
Buy 1 BTC at $60K
Swap 1 BTC for 1 WBTC (Wrapped BTC) at $30K half a year later
Assuming tax rate of 30%, this is a capital loss of 0.3 * 30K = $9K, which can be used to offset capital gains later.
Sell 1 WBTC at $180K three years later (noting that WBTC is pegged to BTC so they are essentially same price in USD terms)
Assuming tax rate of 30%, CGT = 0.3 * 150K - 9K = $36K
The net result for Example 1 is the same as Example 2 so I don't see any benefit to tax loss harvesting.
Can someone explain the benefits of tax loss harvesting using this example?
If all you did was buy a coin, their is no capital gains tax,
you have to sell , and if you sell in the 1st year, it is counted as income.
Tax loss harvesting only make sense in the following scenario,
say you owned Doge coin at below 1 cent and it went to 32 cents,
so you sold most or all of it, cash out a bunch and reinvested into other crypto like BTC or whichever at near peak price.
Now if the price holds near peak , no point in doing anything,
however if the price of the other coins you reinvested in crash before year end, then selling in December, and re-buying in January would lower 2021 capital gains taxes by locking in the losses, and lowering your gains.
Now when you rebuy in Jan 2022, your new cost basis will take effect, but you don't really have to worry about it until their is a new peak, which may or may not be in a few years. If it is, you can pay the extra tax from the increased gains, if not at least you lower your original tax bill.
* Note their is no guarantee, tokens or btc will survive to a new peaks. *But like I said earlier, if you have no big gains, their is nothing to offset.
FYI:
The big gains you are trying to lessen don't always have to be from crypto,
if you have a really large income or did really well in stocks,
you might want to use Tax loss on crypto to help offset those wins and lower your taxes.