Let’s face it, 2018 was a pretty tough year for cryptocurrency markets.
As we fast approach the end of the year, many traders are licking their wounds and trying to reconcile which coins are worth Hodling and which should be abandoned all together. Tough choices indeed!
There is a silver lining though.
These losses that you have incurred on your crypto portfolio can be used to offset gains on other assets that you hold. In other words, you can use them to save money on your tax bill.
This article addresses how to handle your losses and save money on your crypto taxes in the US.
Crypto Losses can Offset Capital Gains
As stated by the IRS, Bitcoin and other cryptocurrencies should be treated as property for tax purposes. This means that you incur a capital gain when you sell/trade your crypto for more than you originally acquired it for, and a capital loss for when you sell it for less.
This is also how other forms of property like stocks and bonds are treated. When traders incur a capital gain, they owe a tax on that gain to Uncle Sam. However, when they incur a capital loss, that loss can be used to reduce or offset gains from other trades or even gains from the sale of other forms of property.
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Unfortunately in the crypto landscape that we are currently experiencing, there are plenty of losses to go around. It is wise to file these capital losses with your yearly tax return in order to reduce your taxable income and save money.
Net Capital Losses & Taxable Income
Whenever your total capital gains and losses for the year add up to a negative number, you incur a net capital loss. If the net capital loss is less than or equal to $3,000 ($1,500 if you are married and filing a separate tax return), then that entire capital loss can be used to offset other types of income–like the income from your job.
If your losses exceed $3,000, then the amount over $3,000 will be rolled forward to the next tax year.
Okay, this is confusing. Can I get a real life example?
Let’s say you started 2018 doing well with your crypto trading. You bought $3,000 worth of Bitcoin and Ethereum and turned that into $8,000 through many different cryptos and many different trades.
Once August rolled around and the markets took a turn for the worse, you were hit hard and the value of your portfolio dropped significantly. You ended up selling out of all of your positions and walked away with just $1,000.
You incurred a net loss of $2,000. Because this net loss is less than $3,000, the entire loss would be deducted from your taxable income for the year. If you made $50,000 for the year in regular income, only $48,000 of that income would be taxable.
Depending on how heavy your losses are, you could be saving a significant amount of money by properly filing your losses–especially if you have other capital gains to offset from a traditional stock portfolio.
How to Report this on Your Taxes
To report your losses, you need to list each trade that you make throughout the year on the IRS form 8949. The 8949 is the form that all tax-payers must fill out listing their capital asset transactions (in this case the capital asset is Bitcoin and cryptocurrency).
For every trade that you made in the calendar year, list the amount of crypto traded, the price (in dollars) traded at, the date traded, the cost basis for the trade, and the capital gain or loss that you incurred.
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Continue to list every trade from the year on this form and total up the net losses at the bottom. Once you complete the 8949, you can transfer this net loss to your 1040 Schedule D, and include it with your tax return.
What if I’ve made hundreds of trades?
A lot of crypto enthusiasts trade quite often. If you haven’t been keeping a clean record for the dates of your trades, the dollar value amounts that you bought and sold your crypto for, and the capital gains/losses from those trades, this reporting process, and creating your 8949 form can become a headache for those with many trades.
If this is a scenario that you are facing, it could be worthwhile to leverage crypto tax software to automatically generate your reports for you.
What about “Crypto Accountants”?
A lot of traders are turning to expensive “crypto accountants” to create their 8949’s for them and to handle the entire tax reporting process. While having a good CPA is important, most of the CPA firms use these same automated crypto tax services to do the intense capital gains and loss calculations.
They then charge the customer a whole lot more on the other end. Do your research before forking over hundreds of dollars. One money-saving option is to handle your crypto gains and loss calculations yourself (the 8949), and then give this data over to your traditional CPA or upload it to a site like TurboTax.
This way you are dodging the expensive piece of the equation. However, everyone’s situation is unique, and at times it can definitely be worthwhile to work with a professional.
Amending Previous Tax Returns
A lot of traders are just realizing now that they need to pay taxes on their crypto gains.
If this is the situation that you are in, you should amend your previous tax returns from the years that you bought and sold crypto but did not report it. You have three years to amend a tax return, so be sure to do this sooner rather than later.
Hopefully you are a wizard of a crypto trader, and you won’t have to harvest any losses from your trading activity. However, if you do have losses, be sure you are taking advantage of them and saving money where the law allows.
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