Can I Write Off Crypto Losses?
The answer is maybe. If you have incurred losses from investing in cryptocurrencies, you may be able to write them off on your taxes. However, there are some stipulations.
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First, some good news: Unlike with stocks, you can use cryptocurrency losses to offset other capital gains on your taxes. So, if you sold Bitcoin for a profit earlier in the year and then experienced a loss later on, you could use that loss to cancel out the earlier gain and reduce your overall tax liability.
What the IRS Says
When it comes to write-offs, the IRS is clear: If you held the asset for less than a year, it’s a short-term capital loss and can be written off against short-term gains. If you held it for more than a year, it’s a long-term capital loss and can be written off against long-term gains. In both cases, the write-off is limited to $3,000 per year.
The Tax Code
Under the Tax Cuts and Jobs Act, taxpayers can deduct up to $3,000 in capital losses each year. This deduction is per person, so a married couple filing jointly can deduct up to $6,000. If your capital losses exceed your capital gains, you can carry forward the losses to future tax years.
It’s important to note that you can only deduct capital losses on cryptocurrency investments held for less than one year. If you hold your crypto for longer than a year, you’ll be taxed at the long-term capital gains rate, which is lower than the ordinary income tax rate.
On October 9, the Internal Revenue Service (IRS) released guidance in the form of frequently asked questions (FAQs) on how taxpayers should report virtual currency transactions. The new FAQs come as a result of the Tax Cuts and Jobs Act, which was passed in December 2017 and went into effect in January 2018.
The IRS guidance addresses how to report income from virtual currency transactions, as well as how to calculate and report any capital gains or losses. The guidance also confirms that virtual currencies are considered property for federal tax purposes and are subject to capital gain or loss treatment.
The release of the new guidance comes as a welcome relief to taxpayers who have been struggling to comply with the IRS’s previous position on virtual currency transactions. In 2014, the IRS issued a Notice clarifying that virtual currency is considered property for federal tax purposes. However, the Notice did not provide much in the way of specific guidance on how to report virtual currency transactions. As a result, many taxpayers have been unsure of how to properly report their virtual currency transactions on their tax return.
The new FAQs provide much needed clarity on how to report income from virtual currency transactions, as well as how to calculate and report any capital gains or losses. The guidance also confirms that virtual currencies are considered property for federal tax purposes and are subject to capital gain or loss treatment. This is good news for taxpayers who have been holding onto their virtual currencies in hopes of realizing a capital gain when they sell or exchange them.
While the new guidance provides some clarity on how to report virtual currency transactions, there are still many unanswered questions. For example, the guidance does not address how to report income from initial coin offerings (ICOs), or how to treat virtual currencies that are received as compensation for services rendered. These are just two of the many unanswered questions that taxpayers will need clarity on in order to fully comply with their tax obligations with respect to their virtual currency holdings.
What This Means for You
The current tax law provides that losses from the sale or trade of cryptocurrency can be deducted as a capital loss. This means that if you sell your crypto for a loss, you can deduct that loss on your taxes.
Short-term crypto losses happen when you sell, trade, or dispose of your digital currency for less than the cost basis—the original price you paid to acquire it. Short-term losses are taxed as ordinary income according to your marginal tax rate. Let’s say you bought one bitcoin for $8,000 and it’s now worth $6,000. You have a short-term loss of $2,000.
If you have a short-term loss and also a long-term loss on cryptocurrency in the same year, the IRS requires that you treat the short-term loss first. So, in the example above, if you also sold another cryptocurrency investment for a $4,000 long-term loss later in the year, your total net capital loss would be $4,000 ($2,000 short-term loss + $2,000 long-term loss).
Individuals who have held cryptocurrency for more than a year and experience a loss on the sale or exchange of their coins may be able to claim that loss on their taxes. This is considered a long-term capital loss, which can offset other capital gains on your return. For example, say you sold stock earlier in the year and made a profit of $5,000. If you also had a long-term crypto loss of $3,000, you could reduce your overall capital gains for the year to $2,000.
How to Claim Your Losses
If you sold your crypto for less than you bought it for, you may be able to claim a capital loss on your taxes. This can offset any capital gains you realized during the year, and it may even lower your overall tax bill. Let’s take a look at how to claim your losses.
On Schedule D of your federal tax return, you report capital gains and losses from the sale or exchange of certain property during the year. If you sold cryptocurrency during the year, you will need to report those transactions on Schedule D.
If you lost money on your cryptocurrency transactions, you may be able to claim those losses as a capital loss on your taxes. Capital losses can offset capital gains for the year, plus up to $3,000 of other income ($1,500 if married and filing separately). If your capital losses exceed your capital gains, you may be able to carry forward those losses to offset gains in future years.
If you sold or traded cryptocurrency, you may need to file Form 8949 with your tax return. Form 8949 is used to report capital gains and losses from the sale or exchange of capital assets. This includes stocks, bonds, mutual funds, and cryptocurrency. You will need to file Form 8949 if you:
-Sold or traded cryptocurrency
-Received cryptocurrency as payment for goods or services
-Exchanged one type of cryptocurrency for another
You will need to complete a separate Form 8949 for each type of cryptocurrency that you sold or traded. For example, if you sold Bitcoin and Ethereum, you would need to complete two forms.
When completing Form 8949, you will need to provide the following information:
-The date that you acquired the cryptocurrency
-The date that you sold or traded the cryptocurrency
-The amount of gain or loss from the sale or trade
-The name and address of the exchange where the trade took place (if applicable)
In conclusion, if you incurred losses from investing in cryptocurrencies, you may be able to deduct those losses on your taxes. However, it’s important to consult with a tax professional to ensure that you’re taking the proper deduction and not overstepping any IRS guidelines.