Tax-loss harvesting with cryptocurrencies

Lin Cong, Wayne Landsman, Edward Maydew and Daniel Rabetti

Journal of Accounting and Economics, 2023, vol. 76, issue 2

Abstract: We describe the taxation landscape in the cryptocurrency markets, especially concerning U.S. taxpayers, and examine how recent increases in tax scrutiny have led to changes in crypto investors' trading behavior. We argue conceptually and then empirically document that increased tax scrutiny leads crypto investors to utilize conventional 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 other gray areas for tax regulation related 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 (search for similar items in EconPapers)
JEL-codes: G15 G18 G29 K29 K42 O16 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Tax-Loss Harvesting with Cryptocurrencies (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:76:y:2023:i:2:s0165410123000319

DOI: 10.1016/j.jacceco.2023.101607

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