ATO Crypto Tax Loss Harvesting Guide
Tax loss harvesting can save you money at tax time, but there are some key dates & rules you need to know. Learn about tax loss harvesting in Australia. 🇦🇺
What is tax loss harvesting?
Also known as tax loss selling, tax loss harvesting is a legal tax reduction strategy. It involves selling an underperforming asset at a loss, in order to offset that loss against taxable gains.
The ATO is clear that capital losses may be offset against gains to reduce your overall tax bill - but there are some rules you need to know about.
For starters, your capital losses must be used at the first opportunity. So if you have capital gains as well as losses in the same financial year, you must use your losses that year to offset.
If you have no capital gains to offset your losses against, you can carry forward your net capital loss to deduct it from your capital gains in later years. There's no time limit on how long you can carry forward losses, but you must use them if you have gains.
There are also a number of non-allowable capital losses, including:
Personal use assets
Assets that are exempt from Capital Gains Tax
Collectibles under a certain value
Read next: The Ultimate Australia Crypto Tax Guide
How tax loss harvesting works
Tax loss harvesting is easiest to understand with an example.
Let’s say you bought Bitcoin at $20,000 and ETH at $4,000. Since then, the price of Bitcoin has gone up to $22,000, while the price of ETH has fallen to $2,000.
You want to cash out your Bitcoin gains so you sell for $22,000. You’ll be liable to pay Capital Gains Tax on your $2,000 gain currently.
But with tax loss harvesting, you could also sell your ETH for $2,000 and offset your $2,000 loss against your $2,000 gain - meaning you’d pay no tax at all.
Some investors may then think they can buy back the asset they realized a loss on - effectively creating a paper loss for tax purposes. But the ATO has specific rules to stop Australian investors from creating artificial losses for tax purposes.
ATO & wash sales
A wash sale is when an investor sells an asset at a loss and purchases the same asset back with the intention of creating a tax benefit. It’s also known as a paper loss or artificial loss.
The ATO is aware investors do this and, as such, has a tax loss selling rule for capital assets to stop investors from being able to offset these losses against gains.
Many other tax offices around the world specify a particular time period where an investor selling and repurchasing an asset would be considered a wash sale - usually around 30 to 60 days. The ATO does not though.
Instead, the ATO says there are a number of factors that may constitute a wash sale - it all comes down to intent. If you're considered to be conducting a wash sale, capital losses as a result of these transactions cannot be claimed and offset against capital gains.
In June 2022, the ATO issued a warning to taxpayers advising them not to engage in wash sales - suggesting it will be a focus for them this tax year. The ATO states taxpayers who engage in wash sales are at risk of facing swift compliance action and potentially additional tax, interest, and penalties. Assistant Commissioner Tim Loh said, “Don’t hang yourself out to dry by engaging in a wash sale. We want you to count your losses, not have them removed by the ATO.”
Read next: What’s the penalty for crypto tax evasion?
What are the important tax loss harvesting dates?
To optimize your position ahead of the tax season opening on July 1st, you’ll need to make any moves ahead of the end of the financial year on June 30th. Any transactions after this date will count toward the next financial year - so if you have gains from the current financial year, make sure to realize your losses before the EOFY in order to optimize your position. You then have until October 31st to file.
Read next: How to file your crypto taxes with myTax
How to tax loss harvest crypto with Koinly
No clue where to start with tax loss harvesting crypto? A free portfolio tracker like Koinly can help. Here’s how it works.
First, you need to know your overall tax liability for the year. Koinly can do that for you. Just connect your wallets and exchanges and Koinly will calculate your existing gains, losses, and income. You can see all of this (free of charge!) in your tax summary.
So in our example, you can see we have a sizeable for the financial year so far. But we don’t want to pay tax on that large an amount. Now we can go over to our dashboard to use our tax optimization tool.
As you can see, your tax optimization tool will show your current realized capital gains for the financial year, as well as your post-harvest gains. To amend your post-harvest gains, you can simulate selling different cryptocurrencies from the asset table below to see the impact it would have on your tax bill. So as you can see in our example, our AXS and COMP tokens are significant long-term losses we could harvest, while our swETH and WETH tokens are small short-term losses we could harvest. If we sold (or otherwise disposed of) these, we could reduce our taxable gains by more than $17,000.
Finally. when the time comes to file, all we need to do is download our crypto tax report and either file with the ATO using myTax, or hand the report over to an accountant.
More questions on tax loss harvesting? We got you covered.
What are the benefits of tax loss selling?
The obvious benefit of tax loss selling is reducing your tax bill! But it can also be a great way to weed out bad investments and reinvest in more profitable assets.
What are the risks of tax loss selling?
Tax loss selling does carry risk - the main one being that you risk selling off assets prematurely and missing out on gains. As well as this, if the ATO views your activities as wash sales (so if you're repurchasing assets at a later date) you may be unable to offset your losses.
Is tax loss selling legal in Australia?
Yes. Tax loss selling is a legal tax optimization strategy provided you follow the wash sale rules.
Can I offset my capital losses against ordinary income?
No. The ATO is clear that investors may only offset capital losses against capital gains. If you have no capital gains, you may carry forward losses to offset future gains.