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Around this time of last year, bitcoin prices were around $ 20,000. However, a lot has changed since then. A confusing fork that generated two new Bitcoin spin-offs and accusations that the price of Bitcoin may have been manipulated last year were two of the factors that led to heavy price drops.
The good news: if you bought Bitcoin or other cryptocurrencies during last year's bull market, you may be able to recover some or all of your losses this year if you sell now. Cryptocurrency losses count as losses. These losses can help you insert a lower tax bracket. Continue reading to find out how it's done.
Tax deductions of cryptocurrency, explained
The United States and most other governments around the world classify cryptocurrencies as resources. When you sell an asset, the transaction can be divided into two ways.
- Capital gain. When you sell a cryptocurrency for more than you paid, this is considered a capital gain. Your profits count as taxable income.
- Loss of capital. When you sell a cryptocurrency for less than you paid, you suffered a capital loss. Capital losses may reduce net income for the year.
If you decide to keep your cryptocurrency, you will not be able to deduct your losses. You have to sell and take the loss if you want to get into a lower tax band.
Tax brackets in a nutshell
The first step towards the amount of money you might be able to save by deducting the cryptocurrency losses is to figure out which tax bracket you currently find. If you are close enough to the edge of the bracket, you may be able to move down.
The IRS provides different tax bands for single and married individuals. A single person who made between $ 9,526 and $ 38,700 last year would have to pay only a basic fee of $ 952.50 plus 12% of any amount earned over $ 9.525. The flat rate for the next parenthesis is $ 4,453.50. Switching from the third bracket to the second can lead to significant savings.
The difference between brackets for married people who present jointly or widows is even greater. Moving a bracket down could help you save thousands of dollars.
Deduction limits
Various forms of income are classified in different ways for tax purposes. For example, income from the sale of property is treated differently from income earned from hourly wages or from an employee.
The IRS will allow you to deduct up to $ 3000 of crypto losses from the money you earn at work. If this loss is greater than $ 3,000, you can deduct $ 3,000 this year and up to $ 3,000 more in the next year.
However, if you sold property or made money trading stocks last year, there is no limit to the deductions you make from that type of income.
What is income derived from mining activities?
Cryptographic operators are not the only ones who can benefit from the deduction of cryptocurrency losses. Miners can also use losses to enter a lower tax bracket.
According to a notice published by the IRS in March 2014:
"[When] a taxpayer successfully virtual currency 'mines', the fair market value of the virtual currency from the date of receipt is understandable in the gross income. "
This information means that if "market fair value" takes a dive and sells the cryptocurrency you extracted, IRS would consider this transaction to be a loss of principal. You can deduct this loss from the amount of money you made last year.
In April, IRS analysts said CNBC electricity costs and other expenses can also be deducted.
Here's the hard part …
Finding out how much money you have earned and earned from cryptocurrency or data mining can be difficult to determine, especially if you have not kept track of your operations. To make sense of your purchase and sale orders, you must have access to historical price data. This price data will tell you if you have made or lost money every time you have initiated a sales order.
Tax software for cryptocurrency traders
Various cryptocurrency taxes software can do all the mathematical calculations for you when you're ready to find out if you can save money through capital deductions.
The way the tax encryption software works is simple. First, link all your crypto portfolios and software exchanges. Then, once connected, the software extracts the transaction data, compares the prices of sit historical cryptocurrency and determines if you have lost or earned money every time you have placed a sales order.
Most cryptocurrency fees calculators are cheap and easy to use. The tool shown below is called CoinTracking.info. It works with all the most popular cryptocurrant exchanges and portfolios.
After determining the total amount lost, you can download the IRS 8949 form. This is the form you need to send to report capital losses. You can also export data to TaxACT or TurboTAX.
Cryptocurrency Accounting Software vs Cryptocurrency Accounting
Many cryptocurrency traders take CPAs that sell themselves as "cryptocurrencies". However, these accountants usually do not have much experience with cryptocurrency. They usually use tools like CoinTracking and other encryption programs publicly available to serve their customers. Because these programs are inexpensive and not difficult to use, taking a CPA for cryptocurrency does not make much sense. Once you have downloaded the IRS 8949 module, all you need to do is to copy the total supplied to the IRS 1040 Schedule D module.
Summary
If you purchased the cryptocurrency at the end of last year or at the beginning of the year when the price was high, you can recover part or all of your losses by depositing a capital loss at the time of tax. If the loss figure is large enough, you may be able to switch to a lower contribution range. This can save you thousands of dollars, depending on a variety of factors. The best way to find out if you qualify is by using a cryptocurrency tax calculator. Cryptographic taxes calculators are cheap, secure and easy to use.
This is a paid content. BTCManager does not endorse any content or product on this page. While we aim to provide you with all the important information we could get, readers should do their research before taking any action related to the company and bring full responsibility for their decisions, nor can this article be considered as investment advice . BTCManager and its employees are not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use or reliance on any content, goods or services mentioned in the press release.
