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For investors who invested for the first time in bitcoins in 2018 or after the end of 2017, they are likely to have suffered substantial losses for the 2018 fiscal year if they have not yet sold. On December 17, 2017, bitcoins reached a record of over $ 19,000. From then on, it has dropped more than 80 percent and is now around $ 4000 at the time of writing. While loss of money is never the ultimate goal, there are some measures that investors can take in order to minimize their taxable income by using the capital losses suffered by bitcoins during the current year and going forward.
Before going into what measures can be taken, it is first necessary to examine how the regulatory bodies that set these precedents consider bitcoins and similar resources. Although this piece is centered on US regulatory requirements applied to bitcoins, it is worth noting that many other countries have similar international regulations.
Bitcoin is property
According to the Internal Revenue Service (IRS), bitcoin is considered personal property. Therefore, all tax laws applicable to the sale of a house or a car or, more accurately, a guarantee, will also apply to the digital currency.
In particular, IRS refers to taxes levied on the sale of an asset as a tax on capital gains, for which there are two types. Taxes on long-term capital gains apply to profits on assets held in a year, while taxes on short-term capital gains apply to assets held for less than a year. Short-term capital gains are taxed at the same rate as the ordinary individual tax rate, which in 2010 was between 10 and 37 percent, depending on the level of income. On the other hand, in 2018, long-term capital gains tax rates are 0 percent, 15 percent or 20 percent. The applicable rate used for the calculation depends on the level of income.
However, in this article we are discussing the opposite of gains, as there are probably very few who took advantage of the 2018 bear market. Tax rates on capital gains are relevant to tax profits but not for losses. The good news is that IRS allows people to reduce their taxable income by applying such losses.
If you sold your Bitcoin to a loss
A lot of people bought bitcoins during the bull run last year. Some "bought the dive" at various points on the way back, only to see the price slip even lower. And many discouraged investors have sold their BTC at a loss along the way. For those short-term investors, there is the possibility of reclaiming some of those losses.
Similarly, if an investor bought bitcoins at any time between the end of September (the last time the prices were so low) and December 2017, they are likely to have losses for 2018 that can be used for lower taxable income if they choose to sell now. This would reduce the amount of taxes due from the given year, provided that the business is not repurchased within 30 days (ie washing sale).
According to the IRS, the maximum amount by which an individual can offset their taxable income for a single year is $ 3,000. But, if an investor has lost more than $ 3,000, the remaining losses can be carried over to subsequent years up to $ 3,000 a year.
For example, if an investor buys 1 BTC at the end of December for $ 17,000 and sells it at $ 4,000 today, he would recognize a loss of $ 13,000. The investor, who is assumed to have regular taxable income, may reduce the taxable income of 2018 of up to $ 3,000. The remaining unused portion of the capital loss in this situation is $ 10,000. The IRS allows $ 3,000 of those $ 10,000 to be returned in the next year to offset any capital gains that could be recognized at the end of 2019.
The case of Hodling
While selling bitcoins at a loss could reduce taxable income in the short term, many bitcoin advocates would immediately point out that the case of clinging to digital assets is much stronger than selling such a marginal and temporary opportunity to save a few dollars in taxes.
There are many who believe that bitcoin will eventually become a store of value, or sound money, and that the best days of the bitcoin's price have yet to come.
However, it is unpredictable when, or even if, bitcoin will carry out this venture. Since it is impossible to predict the short-term price movement of bitcoin, it could be argued that the case of maintaining it for a very long time (commonly referred to as HODLing) points to a much higher future price than the bitcoin that would make today's sale, for a relatively small and countervailable loss, a much greater loss in the coming years.
This article is for informational purposes only and does not constitute tax advice. As always, contact a tax professional to make sure you act in accordance with local tax laws.
