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Crypto increases use of tax loss harvesting

The more governments, especially in the U.S., try to tax crypto, the more crypto owners will use tax loss harvesting to compensate.

This is according to a recent study detailed by the National Bureau of Economic Research. Several sets of data led the researchers to this conclusion.

One was an examination of a proprietary dataset from about 500 traders. The researchers, looking at this data, found that domestic traders, relative to their international peers, increased compliance and tax loss harvesting following increases in tax scrutiny. The use of crypto in tax loss harvesting becomes especially pronounced by the year-end and during market downturns.

Further, the researchers looked at detailed trading activity on 34 exchanges and found similar evidence. The researchers said that exchanges with a presence in, or regulated by, the U.S. government exhibit significantly greater amounts of wash trading than their international peers following an increase in tax scrutiny — and like the other dataset, the researchers found that such activities increase significantly at year-end and during economic downturns.

The researchers said that greater use of tax loss harvesting is not only a spillover effect of tax scrutiny, but also evidence of greater tax compliance because the tax benefits of losses only accrue to investors who report their crypto income to tax authorities.

This might indicate that people like regulated exchanges but, at the same time, don’t really want to be taxed on their activities there. This creates a sort of push-pull effect. The researchers found that, as more people use U.S.-based exchanges, tax scrutiny increases; however, as resultant campaigns targeting traders on U.S. exchanges increase, traders move away from U.S. exchanges to less transparent foreign ones.

The researchers said their findings highlight the importance of policy makers considering people’s reactions to possible changes.

“Accounting research on blockchain and cryptocurrencies is a nascent but vibrant field, offering valuable insights to market players and regulators,” said the paper’s conclusion. “Understanding investors’ responses to policy changes in crypto taxation, as well as describing patterns and trends are just the first steps.”

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