US Crypto Traders Avoiding Billions in Tax by ‘Loss Harvesting’

Crypto traders are avoiding billions of dollars in tax by taking advantage of wild price swings to “harvest” losses so they can be offset against other profits, according to a paper published by the National Bureau of Economic Research.

The analysis, based on a dataset of 500 large retail traders and billions of transactions on 34 crypto exchanges, found that the largely unregulated asset class is becoming a mainstay for tax avoidance.

Had the scale of “tax-loss harvesting” identified by the researchers been used by traders in 2018, when Bitcoin crashed by 30%, it would have cost the US Treasury as much as $16 billion, they estimated.

Crypto trading has exploded since it emerged in 2009. The market was worth more than $1 trillion in the first half of 2022, and almost a third of Americans aged 18-29 claim to have invested, traded, or used a cryptocurrency.

Regulators are struggling to keep up. Traders have been avoiding as much as $50 billion of taxes a year by not declaring their gains, Barclays Plc managing director Joseph Abate estimated last year.

The US Internal Revenue Service has begun to crack down by requiring brokers to report crypto transactions worth at least $10,000 from later this year. However, the increased scrutiny is changing behavior. Some traders are simply switching from illegal evasion to legal avoidance, the NBER paper found.