One man’s problem is another man’s fortune. If you are a Bitcoin trader it is possible to turn your Bitcoin and crypto losses to offset capital gains for tax purposes, saving you money. The US does not permit cryptocurrency trading, but this piece addresses facts you need to be aware for your crypto taxes in the US.
Trades on Bitcoin and losses on crypto can offset other capital gains
When it comes to tax issues, selling cryptocurrency is treated the same as any other capital asset, for instance, bonds, property, stock, etc. This means at any given time you trade Bitcoin or any other crypto, you either realize a capital gain or capital loss.
A capital gain is when you sell your crypto for more than you purchased and you owe the tax man some bucks on the extra dollar you made. On the other hand, when you incur a capital loss, you sell your crypto for less than the purchase price, incurring a loss that you can use to offset gains from other trades. If not, you can use your capital loss to gain from the sale of other property in your portfolio like stocks.
The trend in the crypto field isn’t kind to the majority of investors. There are plenty of losses being experienced and, for any buyer to reduce taxable income and save money, filing capital losses is essential.
$3,000 net capital losses can be deducted against other types of income
Capital losses arise whenever your total capital gains and losses for the year add up to a negative figure. For instance, if your net capital loss is less than or equal to $3,000 or $1,500 if you are married and filing different tax returns, the whole capital loss can be used to pay off other types of income like that from your job.
If the amount exceeds $3,000, the amount over $3,000 will be carried forward to the following year.
The real situation in life
For you to get a clear image, take the below paragraph as an example.
Let’s say you started trading crypto in 2017 and business was good. You traded in Bitcoin and Ethereum and made $50,000. Once August rolled over, the markets took a drastic change for the worst. You couldn’t withstand the pressure, and your portfolio dropped. You sell all your assets and incur a loss of $7,000. At this point, at the end of the year, you will harvest a $2,000 loss. This, however, will be taxed from your taxable income for the year.
If you made an income of $50,000, with this margin of loss, $48,000 of the revenue would be taxable. By filing your losses properly, you could save a significant amount of money depending on how heavy your losses are, especially if you have other capital gains to offset from a traditional stock portfolio.
The Internal Revenue Service Form 8949
For more information on how to report crypto on your taxes, detail each trade you make on IRS form 8949. This includes Sales and Disposition of other Capital Assets. For every deal you make during the year, record the amount of traded crypto, the price, and trade, the cost basis for the trade, and the capital gain or loss made. List every transaction from the year on this document and sum up the net losses at the bottom. The total should be equal to $2,000.
What if you made lots of trades?
It can be a considerable headache to create form 8949 if you haven’t been keeping records of your trades. If you get engulfed in such a scenario, it would be helpful for you to use crypto tax software to automatically create your form 8949.
Be cautious of expensive crypto accountants
Many traders believe expensive crypto accountants are capable of handling the entire tax process and that they are the best option for creating your form 8949. Well, most of these CPA firms use similar automated crypto tax services to handle complex calculations. They end up charging customers millions of dollars.
You will save hundreds of dollars if you do crypto gains and losses calculations by yourself. After that, you can upload the document to a site like TurboTax or hand it over to your usual CPA. This is one way to dodge unnecessary and expensive equations from a crypto accountant.
Once you summarize your capital gains and losses on form 8949, transfer the total figure onto your 1040schedule D.
If you have a loss in your trades, take advantage of them and save money while you can.