Tax-Loss Harvesting with Cryptocurrencies

Lin Cong, Wayne Landsman, Edward Maydew and Daniel Rabetti

No 30716, NBER Working Papers from National Bureau of Economic Research, Inc

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 theoretical 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 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.

JEL-codes: G15 G18 G29 K29 K42 O16 (search for similar items in EconPapers)
Date: 2022-12
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Published as Lin William Cong & Wayne Landsman & Edward Maydew & Daniel Rabetti, 2023. "Tax-Loss Harvesting with Cryptocurrencies*," Journal of Accounting and Economics, .

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Journal Article: Tax-loss harvesting with cryptocurrencies (2023)
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