Tax laws on cryptocurrency are constantly evolving. Here’s what you need to know about claiming crypto losses on your taxes.
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Cryptocurrencies have become a hot topic in recent years, with more and more people investing in them. However, as with any investment, there is always the risk of loss. So, what happens if you lose money on your cryptocurrency investments? Do you have to pay taxes on those losses?
The answer may surprise you. In the United States, losses on cryptocurrency investments are treated like any other investment losses. That means that they can be used to offset other capital gains for the year, or they can be carried forward to offset gains in future years.
Of course, this only applies if you itemize your deductions on your tax return. If you take the standard deduction, then you won’t be able to deduct any investment losses.
If you do itemize, there are some special rules that apply to cryptocurrency losses. For example, if you sell cryptocurrency for a loss and then buy it back within 30 days, the loss is treated as a short-term capital loss. That means it can only be used to offset short-term capital gains (gains on investments held for one year or less). Long-term capital losses can only be used to offset long-term capital gains (gains on investments held for more than one year).
These rules can get complicated, so it’s always a good idea to talk to a tax professional if you have questions about how cryptocurrency losses will impact your taxes.
What is cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its biggest allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. The most common cryptocurrencies are Bitcoin, Ethereum, Bitcoin Cash, Ripple, Litecoin and Monero.
What are the tax implications of cryptocurrency?
Cryptocurrency is a digital or virtual asset that uses cryptography for security. Cryptocurrency is decentralized, meaning it is not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrency is taxed differently than other investments, and the tax implications of cryptocurrency are still being sorted out by the IRS.
Short-term gains and losses
Short-term gains and losses are gains or losses that result from the sale or exchange of a capital asset that you held for one year or less. If you realize a short-term gain, you’ll be taxed at your regular income tax rate. Short-term losses can offset short-term gains, but they can also offset other types of income on your tax return.
If you have a net short-term loss, you can carry it forward to offset future short-term gains, but you can’t carry it back to offset past short-term gains.
Long-term gains and losses
Generally, if you hold a cryptocurrency for more than one year before selling it, you will be taxed at the long-term capital gains rate, which is lower than the ordinary income tax rate. For example, if you are in the 24% tax bracket, your long-term capital gains rate would be 15%.
How to report cryptocurrency taxes
Just like stocks, cryptocurrency is subject to capital gains taxes. So, if you sell your crypto for more than you paid for it, you’re on the hook for the taxes. But what about when you lose money on crypto? Do you have to pay taxes on those losses?
Capital gains and losses
Cryptocurrencies are taxed as capital assets. That means any gains or losses from buying, selling, or even trading cryptocurrency are subject to capital gains taxes. For example, say you bought Bitcoin for $11,000 and it’s now worth $19,000. If you sell it, you’ll owe taxes on the $8,000 profit.
Short-term capital gains are taxed as ordinary income at your marginal tax rate. So if you’re in the 24% tax bracket, you’ll owe $1,920 in taxes ($8,000 x 24%). Long-term capital gains are taxed at a lower rate — 0%, 15%, or 20%, depending on your tax bracket.
To qualify for the long-term capital gains rate, you must hold the cryptocurrency for more than a year before selling. If you don’t meet the holding period requirement, your gains will be short-term and taxed at your marginal tax rate.
Income from cryptocurrency
If you made income from selling, trading, or using cryptocurrency, you will need to pay taxes on that income. The amount of tax you owe will depend on how much income you made and what tax bracket you are in.
There are a few different ways that you can be taxed on cryptocurrency. The most common is capital gains tax, which is a tax on the profit you make from selling cryptocurrency. If you sold cryptocurrency for more than you bought it for, you will owe capital gains tax on the difference.
If you hold cryptocurrency as an investment, you will also owe taxes on any dividends or interest that your investment pays out. Dividends and interest are considered taxable income, so you will need to report them when you file your taxes.
Finally, if you use cryptocurrency to pay for goods or services, you may be subject to sales tax. Sales tax is a tax on the purchase price of goods and services, and it is typically calculated based on the state where the purchase was made.
The bottom line is that if you lose money on your crypto investments, you may be able to deduct it from your taxes. However, the rules are complex and there are a number of caveats to be aware of. If you have any questions, it’s always best to speak to a tax professional.