How Bitcoin And Crypto Traders Can Turn Losses Into Tax Savings
Bitcoin and other cryptos have seen a dramatic fallout in value throughout 2018. While this is bad news for a lot of traders, it pays to understand that these losses offset other types of capital gains. You can use them to save money on your tax bill. This article addresses how to handle your losses and the important items to keep in mind for your crypto taxes in the US.
Losses on Crypto and Bitcoin trades offset other types of capital gains
As stated by the IRS, Bitcoin and cryptocurrency 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.
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 some money.
The IRS Form 8949
To report your losses, you need to list each trade that you make throughout the year on the IRS form 8949. For every trade, 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. 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.
Net capital losses up to $3,000 can be deducted against other types of 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 a little confusing. Can I get an 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. 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.
If your trading situation is a complicated one, it could be worthwhile to consult a crypto tax professional to assist you with your tax return.
What if I am a high volume trader?
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 Bitcoin or Crypto Tax Calculators to automatically generate your 8949 for you.
Should I hire a “Crypto Accountant”?
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, 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, so it’s best to use judgement.
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 you can.