Tax-Loss Harvesting with Cryptocurrencies

70 Pages Posted: 17 Feb 2022 Last revised: 21 Sep 2022

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Edward L. Maydew

University of North Carolina at Chapel Hill

Daniel Rabetti

Tel Aviv University - Coller School of Management

Date Written: October 2021

Abstract

We describe the landscape of taxation in the crypto markets, especially that concerning U.S. taxpayers, and examine how recent increases in tax scrutiny have led to changes in trading behavior by crypto traders. We predict under a simple conceptual framework and then empirically document that increased tax scrutiny leads crypto investors to utilize legal tax planning with tax-loss harvesting as an alternative to non-compliance. In particular, domestic traders increase tax-loss harvesting following the increase in tax scrutiny, and U.S. exchanges exhibit a significantly greater amount of wash trading. Additional findings suggest that broad-based and targeted changes in tax scrutiny can differentially affect crypto traders' preference for U.S.-based exchanges. We also discuss new gray areas for tax regulation relating to new crypto assets such as Non-Fungible Tokens and Decentralized Finance protocols that further highlight the importance of coordinating tax policy and other regulations.

Keywords: Bitcoin, Cryptocurrencies, DeFi, IRS, NFT, Regulation, Taxation, Trading Behavior.

JEL Classification: G15, G18, G29, K29, K42, O16.

Suggested Citation

Cong, Lin and Landsman, Wayne R. and Maydew, Edward L. and Rabetti, Daniel, Tax-Loss Harvesting with Cryptocurrencies (October 2021). Available at SSRN: https://ssrn.com/abstract=4033617 or http://dx.doi.org/10.2139/ssrn.4033617

Lin Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.linwilliamcong.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Daniel Rabetti (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel
972-54-9107234 (Phone)

HOME PAGE: http://https://en-coller.tau.ac.il/

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