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Can capital losses from cryptocurrency trading offset stock gains for tax purposes? The answer may surprise you.
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Introduction
It’s been a rough year for the stock market, with major indexes like the Dow Jones Industrial Average and the S&P 500 down significantly from their all-time highs. So far in 2018, the Dow is down about 5%, while the S&P 500 is down about 7%.
But even though it’s been a tough year for stocks, there’s one asset class that’s been doing even worse: cryptocurrency. Bitcoin, the largest and most well-known cryptocurrency, is down more than 50% from its highs at the end of 2017. Ethereum, another major cryptocurrency, is down more than 60% from its highs.
With cryptocurrencies falling so much further and faster than stocks, you might be wondering if your crypto losses can offset your stock gains and lower your overall tax bill. Unfortunately, the answer is no.
What is a capital loss?
A capital loss is realized when a security or investment is sold for less than the original purchase price. Capital losses can offset capital gains realized from the sale of securities or investments in the same calendar year, plus up to $3,000 in ordinary income. Net capital losses in excess of these amounts can be carried forward to future tax years.
How to offset stock gains with crypto losses
Crypto investors were dealt a tough blow in 2018. The total market capitalization for digital assets fell by more than $700 billion, and prices are still well below their all-time highs. While the stock market also experienced a correction last year, it has since bounced back and is now at or near all-time highs. For investors who were in both the stock and crypto markets last year, it’s possible that their crypto losses can offset their stock gains. Here’s how it works.
Short-term vs. long-term capital gains
Short-term capital gains occur when you sell an asset that you’ve owned for one year or less. Long-term capital gains occur when you sell an asset that you’ve owned for more than one year. In general, long-term capital gains are taxed at a lower rate than short-term capital gains.
Cryptocurrency is considered a capital asset, so any gains or losses from selling crypto are subject to capital gains tax. The tax rate on short-term capital gains is the same as your ordinary income tax rate, while the tax rate on long-term capital gains is usually lower.
To offset stock gains with crypto losses, you’ll need to calculate your net capital gain or loss for the year. To do this, add up all your crypto losses and subtract them from your stock gains. If the result is a positive number, then you have a net capital gain and will owe taxes on that amount. If the result is negative, then you have a net capital loss and can use that loss to offset other capital gains (up to $3,000 per year).
How to calculate your net capital gain or loss
In order to calculate your net capital gain or loss, you will need to first determine your total capital gains and losses for the year. To do this, you will need to gather all of your investment income information for the year, including any interest, dividends, or capital gains/losses from the sale of stocks, bonds, mutual funds, etc.
Once you have this information, you will need to calculate your total capital gains and losses for the year. This can be done by subtracting your total losses from your total gains. If your losses exceed your gains, you will have a net capital loss for the year.
Once you have determined your net capital gain or loss for the year, you can then offset this amount against any other capital gains/losses you may have incurred during the year. If you have a net capital gain for the year, you can offset up to $3,000 of this gain with losses from other investments. If you have a net capital loss for the year, you can carry this loss forward to offset future capital gains.
Conclusion
Based on the information above, it appears that crypto losses can offset stock gains in certain circumstances. However, it is important to speak with a financial advisor to get a more comprehensive understanding of how this would work in your specific situation.
