Tax-Loss Harvesting with Cryptocurrencies

We study investors' responses to increasing tax reporting awareness and scrutiny in the crypto markets. We document significant taxation effects on investors' behavior and preferences for crypto exchanges using novel data on retail investors' trading. In relation to international peers, U.S.-based investors decrease taxable events while exploiting tax-loss harvesting to balance portfolio losses. We further examine billions of trades on the trading books of large crypto exchanges and discover widespread tax-loss harvesting trades on U.S.-based crypto exchanges, amounting to billions of dollars in tax revenue losses for the government. Finally, we discuss ongoing anti-tax-loss harvesting proposals in anticipation of traders' likely reactions