Turning your 2018 Bitcoins and Crypto Loss into tax savings

The cryptocurrency market saw a sharp decline in 2018. With Bitcoins rising from $ 17,000 per coin in January 2018 to around $ 3,500, many traders suffered losses from the start of the year.

This post is the opinion of the author and is not financial, tax planning or tax advice. Please talk to your tax expert, CPA or tax lawyer about how you should deal with the taxation of digital currencies. This content has been reviewed by a certified public accountant.

Although this is not ideal, it is worth understanding how losses offset other types of capital gains. In other words, you can take advantage of your crypto losses to save on your bill. This article discusses how to manage your losses, as well as how to effectively store your cryptographic taxes in the United States.

Losses Offset Other Capital Gains

IRS treats Bitcoin and other cryptocurrencies as property for tax purposes. This means that you incur a capital gain when you sell or exchange your crypto for more than you originally purchased, and a capital loss when you sell it at lower prices. Taxes on capital gains are not new, and these same taxes apply to other forms of property, such as shares, bonds or real estate.

When traders claim a capital gain, they owe a tax on that income to Uncle Sam. However, when they incur a capital loss, such loss can be used to reduce or offset gains from other transactions, or even gains from the sale of other forms of property.

Example

Let's say you invested $ 1000 in Apple shares this year. Six months after you invested, you sold your shares because the value of your investment has increased to $ 1,400. For this transaction, you have a capital gain of $ 400 to which you have to pay taxes.

Now let's say you have also invested in Bitcoin this year: you bought $ 1,000 of Bitcoin and you saw that the investment is reduced by $ 600. You sold your Bitcoin at this price and you realized a loss of capital of $ 400.

Your loss of $ 400 on Bitcoin compensates your $ 400 gain in the stock market, so you no longer have a capital gain liability, which means you do not pay tax on your tax bill.

Unfortunately, there are many losses to be avoided. Some traders have very large losses. It is advisable to store these capital losses with your annual tax return to reduce your taxable income and save money.

Net capital losses of up to $ 3,000 can be deducted from other types of income

When the sum of total capital gains and losses is negative, there is a net loss of capital. If the net loss is less than or equal to $ 3,000 ($ 1,500 if you are married and a separate tax return is presented), then the entire capital loss can be used to offset other types of income, as income derived from work.

This is an important distinguishing factor from our previous example in which we offset other types of capital gains. You can actually deduct your losses (up to $ 3,000) against normal income. This form of collecting tax losses can save traders considerable losses of money.

If your losses exceed $ 3,000, then the amount over $ 3,000 will be forwarded to the next fiscal year.

Another example

Let's say you started 2018 going well. You bought $ 3,000 of Bitcoin and Ethereum and turned them into $ 8,000 by trading on altcoin markets.

Once August has rolled, and the markets have taken a turn for the worse, the value of the portfolio has dropped significantly. You ended up selling off your positions and you left with only $ 1,000.

You have suffered a net loss of $ 2,000. Because this net loss is less than $ 3,000, the entire loss will be deducted from taxable income for the year. If you earned $ 50,000 for the regular income, only $ 48,000 of that income would be taxable.

Depending on how heavy your losses are, you could save a significant amount of money by depositing your losses correctly, especially if you have other capital gains to be offset by a traditional equity portfolio.

How to report losses

To report losses, each operation carried out during the year must be listed on the IRS 8949 form. The 8949 is the form that all tax payers must complete to list their capital transactions (in this case the fixed assets are Bitcoin or another cryptocurrency).

To complete your 8949, you need to list the amount of the encrypted trade, the price traded (in dollars), the traded date, the cost basis for the trade and the capital gain or loss you incurred for each operation carried out during the year. This includes coin-to-coin transactions. Once 8949 is completed, you can transfer this net loss to Planning D 1040 and include it with your tax return.

And if hundreds of trades were made?

A lot of cryptography enthusiasts exchange quite often. If you have not kept a clean record of the dates of your trades, the amounts in US dollars that you bought and sold for your crypt, and the capital gains and losses arising from these operations, then the process to fill out the 8949 form may become a headache.

If this is a scenario you are facing, it may be useful to use tax encryption software to automatically generate reports on behalf of the user.

Taking a & # 39; Crypto Accountant & # 39;

Many traders turn to expensive "cryptocurrencies" to create their 8949 for them and to manage the entire fiscal reporting process. While having a good CPA is important, most CPA companies use these same automated encryption services to make intense capital gains and loss calculations.

A "money-saving" option is to independently manage cryptographic gains and losses using tax encryption software, then transfer this data to the traditional CPA or upload it directly to a site like TurboTax. The most expensive part of the filing fees is the hiring of a tax professional, and by doing the heavy lifting you skip the most expensive part of the equation.

Change of previous tax returns

Many traders are now realizing that they have to pay taxes on their crypto-earnings. If this is your situation, you should change your previous tax returns in the years you bought and sold crypto. You have three years to change a tax return, so make sure you do it sooner rather than later to avoid penalties.

I hope you are a better crypto trader than me and you will not have to collect any loss of the year. However, if you have losses, be sure to take advantage of this by saving money where the law permits.