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Do you have to report your cryptocurrency losses on your taxes? The answer may surprise you.
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Introduction
If you have a loss from selling, spending, or trading cryptocurrency, you may be able to deduct it on your tax return. This is true even if you don’t itemize deductions.
To deduct a crypto loss, you’ll need to:
– Have records of your transactions
– Prove that you held the crypto for more than a year (long-term capital gains) or less than a year (short-term capital gains)
– Determine the fair market value of the crypto at the time of theTransaction
What is considered a crypto loss?
Crypto losses can come in many forms, but the most common is when the value of your investment falls. This can happen for a number of reasons, including a general market downturn or a sudden drop in the value of a specific coin or token.
There are two types of crypto losses that you need to be aware of: capital losses and ordinary losses.
Capital Losses
A capital loss occurs when you sell or exchange cryptocurrency for less than what you paid for it. For example, if you bought 1 BTC for $10,000 and then sold it later for $9,000, you would have made a capital loss of $1,000.
Capital losses can be used to offset capital gains made from selling other investments, like stocks or real estate. In the United States, capital losses can be used to offset up to $3,000 in capital gains each year. If your total capital losses exceed $3,000, you can carry forward the excess to offset gains in future years.
Ordinary Losses
An ordinary loss occurs when you dispose of cryptocurrency that is not considered a “capital asset”. For most people, this will happen when they lose their private keys or when their wallets are hacked. Ordinary losses are not tax-deductible.
How to report crypto losses
Cryptocurrencies are digital or virtual tokens that use cryptography for security. They are decentralized, which means they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
Short-term losses
Short-term losses on crypto are treated like any other short-term investment losses. You report these losses on Schedule D of your Form 1040. These include losses that you realized within one year of the date you purchased the crypto.
Long-term losses
If you held the cryptocurrency for more than a year before selling it, you will incur a long-term capital loss. This can be offset against any capital gains you made in the same financial year, or carried forward to future years.
To calculate your long-term capital loss, you will need to know the:
-date you acquired the cryptocurrency
-amount you paid for the cryptocurrency
-date you sold the cryptocurrency
-amount you received for selling the cryptocurrency
You will then subtract the amount you paid for the cryptocurrency from the amount you received for selling it. This will give you your capital gain or loss for that particular transaction.
What if I don’t report my crypto losses?
Not reporting your crypto losses can have a few different implications. The most immediate one is that you may end up owing more taxes than you otherwise would have.
If you don’t report your crypto losses, the IRS may treat it as though you sold your crypto for its fair market value on the day it became worthless. So, if you bought Bitcoin for $1,000 and it became worthless a year later, the IRS may treat it as though you sold Bitcoin for $1,000 on the day it became worthless.
This could create a taxable event, meaning you may owe taxes on any gains between the time you purchased the crypto and the time it became worthless. And because crypto is considered property for tax purposes, those taxes could be significant. For example, if you’re in the 24% tax bracket and owed taxes on $900 of gains, you’d owe $216 in taxes.
Of course, reporting your losses can also help lower your tax bill. That’s because when you report your losses, they offset any gains you have from selling crypto. So, if you sold Bitcoin for a $1,000 gain and had $900 of losses from other cryptos, you’d only owe taxes on $100 of gains.
In short, not reporting your crypto losses can lead to owing more taxes than necessary. So it’s generally best to err on the side of caution and report any and all crypto losses to the IRS.
Conclusion
While it’s still technically possible to make a profit by buying and selling cryptocurrencies, the reality is that the market has crash hard in 2018. This has caused many people to lose a lot of money, and some have even been wiped out completely.
The good news is that if you have suffered crypto losses, you can offset them against other capital gains to reduce your tax bill. For example, if you made $10,000 in crypto profits in 2017 but then lost $5,000 in 2018, you would only owe taxes on $5,000.
Of course, this only works if you report your losses to the IRS. Unfortunately, many people are unaware of this rule and don’t end up claiming their losses when they file their taxes. As a result, they end up paying more taxes than they need to.
If you have lost money in the cryptocurrency crash, be sure to consult a tax professional to see if you can claim any of your losses on your taxes.
