Guest post by David Kemmerer from CryptoTrader.Tax
David is the Co-Founder of CryptoTrader.Tax.
The cryptocurrency market saw a dramatic fallout throughout 2018. With Bitcoin falling from a value of $17,000 per coin in January of 2018 to around $3,500, many traders incurred losses since the start of the year.
This post is the opinion of the author and is not financial, tax planning or tax advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies. This content was reviewed by a Certified Public Accountant.
While this isn’t ideal, it pays to understand how losses offset other types of capital gains. In other words, you can leverage your crypto losses to save money on your tax bill. This article addresses how to handle your losses, as well as how to actually file your crypto taxes in the US.
Losses Offset Other Capital Gains
The IRS treats Bitcoin and other cryptocurrencies as property for tax purposes. This means that you incur a capital gain when you sell or trade your crypto for more than you originally acquired it for, and a capital loss when you sell it for less. Capital gains taxes are nothing new, and these same taxes apply to other forms of property, like stocks, bonds, or real estate.
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.
Let’s say you invested $1000 into Apple stock this year. Six months after investing, you sold your stock because the value of your investment grew to $1,400. For this transaction, you have a $400 capital gain that you owe taxes on.
Now let’s say that you also invested in Bitcoin this year: You bought $1000 worth of Bitcoin and saw that investment fall in value to $600. You sold your Bitcoin and at this price and realized a $400 capital loss.
Your $400 loss on Bitcoin offsets your $400 gain in the stock market, therefore you no longer have a capital gain liability, meaning you pay no taxes on gains for your tax bill.
Unfortunately, there are plenty of losses to go around. Some traders have very substantial losses. It is wise to file these capital losses with your yearly tax return to reduce your taxable income and save money.
Net capital losses up to $3,000 can be deducted against other types of income
When the sum of total capital gains and losses are negative, 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.
This is an important distinguishing factor from our above example where we were offsetting other types of capital gains. You can actually deduct your losses (up to $3,000) against normal income. This form of tax loss harvesting can save traders with substantial losses money.
If your losses exceed $3,000, then the amount over $3,000 will be rolled forward to the next tax year.
Let’s say you started 2018 doing well. You bought $3,000 worth of Bitcoin and Ethereum and turned that into $8,000 by actively trading on the altcoin markets.
Once August rolled around, and the markets took a turn for the worse, the value of your portfolio dropped significantly. You ended up selling out 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 Losses
To report your losses, each trade that was made throughout the year needs to be listed on the IRS form 8949. The 8949 is the form that all taxpayers must fill out for listing their capital asset transactions (in this case the capital asset is Bitcoin or another cryptocurrency).
To complete your 8949, you need to list the amount of crypto traded, the traded price (in dollars), the date traded, the cost basis for the trade, and the capital gain or loss that you incurred for every trade you made during the year. This includes coin-to-coin trades. 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 Hundreds of Trades Were Made?
A lot of crypto enthusiasts trade quite often. If you haven’t been keeping a clean record of the dates of your trades, the US dollar value amounts that you bought and sold your crypto for, and the capital gains and losses from those trades, then the process for filling the 8949 form can become a headache.
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.
Hiring 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.
One “money-saving” option is to handle your crypto gains and loss calculations yourself by using crypto tax software, and then give this data over to your traditional CPA, or directly upload it to a site like TurboTax. The most expensive part of filing taxes is hiring a tax professional, and by doing the heavy-lifting you dodge the most expensive part of the equation.
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 your situation, you should amend your previous tax returns from the years that you bought and sold crypto. You have three years to amend a tax return, so be sure to do this sooner rather than later to avoid penalties.
Hopefully, you are a better crypto trader than I am and you won’t have to harvest any losses from the year. However, if you do have losses, be sure you are taking advantage of them by saving money where the law allows.Filed Under: Cryptocurrency Taxes, Guest Post
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