There are headlines floating around about enforcing wash sale rules for crypto capital gains and losses, this prompted me to look into tax loss-harvesting, and it turns out I don't understand it at all.
This article provides an example scenario of how loss-harvesting works with crypto transactions. To summarize:
- Lucky purchases crypto at $50k
- As it drops in value, sells and repurchases it several times
- He finally repurchases it at $15k, with a capital loss of 35k on the books
- The crypto asset then rises to 55k
- He sells at 55k
- At this point in time, he has:
- Capital Losses: 35k
- Basis: 15k
That gives him a net profit of 40k, and deducting 35k losses, he pays capital gains tax on 5k
Now if he didn't bother with the whole selling and repurchasing song and dance, his basis was 50k and he nets 5k at sale and still pays capital gains taxes on 5k.
How did Lucky benefit from loss-harvesting?