Investors can now optimize their crypto portfolio returns through strategic asset rebalancing with tax-loss harvesting, a technique that allows them to defer near-term tax obligations and keep more invested today for greater long-term compounded growth.
Tax-Loss Harvesting for Multi-Asset Crypto Portfolios: A Primer
Understanding Tax-Loss Harvesting
Investors buy assets they expect to appreciate over time, but markets ebb and flow, and no asset perpetually rises without experiencing some losses along the way. When investors hold one or more of their assets at a loss, they can sell the depreciated asset(s), realize the loss, and use those realized losses to offset realized gains or ordinary income.
Tax-loss harvesting is a strategy used to offset capital gains with capital losses, reducing tax liabilities.
It involves selling securities at a loss and using the loss to reduce gains from other investments.
This technique can be particularly beneficial for investors holding highly appreciated assets, such as stocks or real estate.
By implementing tax-loss harvesting, individuals can minimize their tax burden and optimize investment returns.
According to the IRS, taxpayers can use up to $3,000 in annual losses to offset ordinary income.
Benefits of Tax-Loss Harvesting
The outcome is that investors pay less in taxes at the end of the year while still maintaining their exposure — deferring near-term tax obligations and getting to keep more invested today for greater long-term compounded growth. This technique allows ‘investors to get more from their holdings’ , making it a valuable tool for those with large, diversified liquid portfolios.
Why Automated Tax-Loss Harvesting?
Software and algorithms are better suited to systematically exploit tax-loss harvesting opportunities than manual human involvement. To effectively harvest losses, investors need to track their cost basis and purchase dates and perform the requisite trading across all of their holdings — tasks that are more effectively handled by a mechanical process, especially when scaling up this technique for multi-asset portfolios with dozens of digital assets.
Tax-loss harvesting is a financial strategy that involves selling securities with losses to offset gains from other investments.
Automated tax-loss harvesting uses algorithms to identify and sell securities with losses, often resulting in significant tax savings.
This strategy can be particularly beneficial for investors holding large portfolios or those subject to high tax rates.
By automating the process, investors can minimize their tax liabilities while maintaining a diversified portfolio.
When Does Tax-Loss Harvesting Work Best?
TLH is particularly well-suited for crypto markets, which exhibit relatively higher volatility compared to other asset classes like equities and fixed income. Portfolios with dozens of digital assets generally have greater TLH flexibility compared to single-asset holdings or portfolios with only a small number of digital assets.
Crypto markets refer to the global exchange platforms where cryptocurrencies are bought, sold, and traded.
These markets operate 24/7, allowing users to access a wide range of digital assets.
The crypto market capitalization has grown significantly since its inception, with over $2 trillion in total value.
Major players include Bitcoin, Ethereum, and other altcoins.
Market fluctuations are influenced by factors such as supply and demand, regulatory changes, and global economic conditions.
Limitations of Tax-Loss Harvesting
TLH may not work for exchange-traded funds (ETFs), as they represent a single holding, and there is no flexibility to trade the underlying stocks. Additionally, single-asset investments or a small number of holdings do not lend themselves well to TLH due to the lack of replacement assets.
Getting Started with Tax-Loss Harvesting
Investors can use direct-index crypto separately managed accounts (SMAs) from cryptocurrency SMA managers to access liquid, actively managed multi-asset portfolios that encompass dozens of assets, rebalance automatically, and perform automated TLH.
