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If you’ve suffered crypto losses, you may be wondering if you have to report them on your taxes. The answer is complicated, but we’ve got you covered.
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Introduction
Cryptocurrency investors may be wondering if they need to report their losses on their taxes. The answer is: it depends.
If you sell cryptocurrency at a loss, you may be able to claim a capital loss on your tax return. This can offset other capital gains you have made, and reduce the amount of tax you owe.
However, there are some restrictions on how capital losses can be claimed. For example, you can only claim a capital loss if you sold the cryptocurrency within 30 days of it being stolen or lost. And, if you sold cryptocurrency for less than its cost basis (the price you paid for it plus any fees), you may not be able to claim the full amount of your loss.
It’s also important to note that, even if you don’t owe any tax on your cryptocurrency gains, you may still need to report them to the IRS. So, if you’re not sure whether or not you need to report your crypto losses (or gains), it’s best to consult with a tax professional.
What is cryptocurrency?
Cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Since then, numerous other cryptocurrencies have been created. These are frequently called altcoins, as a blend of alternative coin. Bitcoin and altcoins are mined through cryptographic algorithms that solve complex mathematical equations.
Individuals or companies engage in mining cryptocurrency by running special computer hardware. Miners are motivated by rewards—usually in the form of cryptocurrency—for verifying and committing blocks of transactions to the blockchain public ledger. Blockchain is the digital and decentralized ledger that records all cryptocurrency transactions. Current best practice is for individuals and companies to keep their cryptocurrency in wallets which support the correct level of security for their needs
What are the tax implications of cryptocurrency?
Cryptocurrency isn’t just digital money. It’s an asset class that is taxed differently than other investments. Here’s what you need to know about the tax implications of cryptocurrency.
The IRS treats cryptocurrency as property, not currency, for tax purposes. This means that you’re subject to capital gains taxes when you sell or trade cryptocurrency.
If you hold cryptocurrency for more than a year, you’re eligible for long-term capital gains rates, which are lower than short-term rates.
Short-term capital gains are taxed at your marginal tax rate, which ranges from 10% to 37%. Long-term capital gains are taxed at a lower rate of 0%, 15%, or 20%, depending on your tax bracket.
If you lose money on your cryptocurrency investments, you can deduct those losses from other capital gains. For example, if you lost $3,000 on cryptocurrency in 2018 but earned $5,000 in long-term capital gains from stocks, you would only pay taxes on $2,000 of your total capital gains.
To deduct cryptocurrency losses, you must itemize your deductions on Schedule A of your tax return. You can deduct up to $3,000 in capital losses each year. If your losses are greater than $3,000, you can carry them forward to future tax years.
Do you have to report cryptocurrency losses?
Cryptocurrency losses are unfortunately a common occurrence. Volatile markets and exchanges getting hacked can result in substantial losses in a short amount of time.
But do you have to report cryptocurrency losses on your taxes?
The answer is yes, you most likely will have to pay taxes on any gains or losses from selling or trading cryptocurrencies.
This is because cryptocurrencies are considered capital assets, and any gains or losses from buying, selling, or trading them are subject to capital gains taxes.
If you hold onto your cryptocurrencies for more than a year before selling or trading them, you may be eligible for long-term capital gains rates, which are generally lower than short-term rates.
Reporting cryptocurrency losses on your taxes can be a complex process, so it’s important to seek professional help if you’re not sure how to do it.
How to report cryptocurrency losses
The short answer is yes, you are required to report capital losses on your taxes. This is true whether you sold your crypto, it was stolen from you, or if you simply lost it.
Here’s what the IRS has to say on the matter:
“If you sold or exchanged cryptocurrency, you must report it as a capital gain or loss. Generally, capital gains or losses from selling or exchanging cryptocurrency are taxed as capital gains or losses. A gain or loss is realized when a taxpayer sells or exchanges cryptocurrency for fiat currency, other property, including another cryptocurrency. A gain or loss is realized on the difference between the fair market value (FMV) of the cryptocurrency when it is received and its FMV when it is sold or exchanged.”
What this means is that if you sell your Bitcoin for $5,000 and bought it when it was $3,000, you will have to pay taxes on that $2,000 profit. Alternatively, if you bought Bitcoin for $5,000 and it’s now worth $3,000, you can deduct that $2,000 loss come tax time.
Conclusion
At this point, it should be clear that you do have to report any losses you incur from your cryptocurrency investments on your taxes. The IRS currently views cryptocurrency as property, which means any gains or losses from selling or trading it are subject to capital gains taxes. This also means that if your cryptocurrency is stolen, you can deduct the loss on your taxes as well.
While it may seem like a hassle to keep track of all your crypto gains and losses, it’s important to do so in order to avoid any penalties from the IRS. There are a number of different ways to track your crypto transactions, so find one that works best for you and make sure to keep accurate records.
