Around this time last year, Bitcoin prices were hovering around $20,000. However, much has changed since then. A confusing fork that spawned two new Bitcoin spin-offs and accusations that the price of Bitcoin may have been manipulated last year were two of the contributing factors that led to massive price drops.
The good news: if you bought Bitcoin or other cryptocurrencies during last year’s bull market, you may be able to recoup some or even all of your losses this year if you sell now. Cryptocurrency losses count as capital losses. These losses can help you enter a lower tax bracket. Read on to find out how it’s done.
Cryptocurrency Tax Deductions, Explained
The United States and most other governments around the world classify cryptocurrencies as assets. When you sell an asset, the transaction can be categorized in one of two ways.
- Capital gain. When you sell a cryptocurrency for more than you paid for it, this is considered a capital gain. Your profits count as taxable income.
- Capital loss. When you sell a cryptocurrency for less than you paid for it, you’ve incurred a capital loss. Capital losses can reduce your net income for the year.
If you decide to hold onto your cryptocurrency, you won’t be able to deduct your losses. You have to sell and take the loss if you want to enter a lower tax bracket.
Tax Brackets in a Nutshell
The first step toward how much money you may be able to save by deducting your cryptocurrency losses is understanding which tax bracket you’re currently in. If you’re close enough to the edge of the bracket, you may be able to move down.
The IRS provides different tax brackets to single and married individuals. A single person that made between $9,526 and $38,700 last year would only have to pay a $952.50 base tax plus 12% of any amount earned above $9,525. The flat fee for the next bracket up is $4,453.50. Moving from the third bracket down to the second one can result in significant savings.
The difference between brackets for married people filing jointly or widows is even greater. Moving one bracket down could help you save thousands of dollars.
Various form of income are classified in different ways for tax purposes. For example, income gained from the sale of property is treated differently compared to income gained from hourly pay or a salaried job.
The IRS will let you deduct up to $3,000 worth of crypto losses from the money that you make at work. If that loss is greater than $3,000, you can deduct $3,000 this year and up to $3,000 more next year.
However, if you’ve sold property or made money trading stocks last year, there’s no limit to any deductions you make from that type of income.
What About Income Gained from Mining?
Crypto traders aren’t the only ones that can benefit from deducting cryptocurrency losses. Miners can also use losses to enter a lower tax bracket.
According to a notice published by the IRS in March of 2014:
“[When] a taxpayer successfully ‘mines’ virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.”
This information means that if “fair market value” takes a nosedive and you sell the cryptocurrency that you mined, the IRS would consider that transaction to be a capital loss. You can deduct that loss from the amount of money that you made last year.
In April, IRS analysts told CNBC that electricity costs and other expenses can be deducted as well.
Here Comes the Hard Part…
Finding out how much you made and lost from cryptocurrency trades or mining can be hard to determine, especially if you haven’t been keeping track of your trades. In order to make sense of your buy and sell orders, you need to have access to historical pricing data. This pricing data will tell you whether or not you made or lost money each time you initiated a sell order.
Tax Software for Cryptocurrency Traders
Various cryptocurrency tax software can do all the hard math for you when you’re ready to find out if you can save money through capital loss deductions.
The way crypto tax software works is simple. First, you link all your crypto wallets and exchanges to the software. Then, once connected, the software extracts your transaction data, compare sit to historical cryptocurrency prices and determines whether or not you lost or made money each time you placed a sell order.
Most cryptocurrency tax calculators are inexpensive and easy to use. The tool depicted below is called CoinTracking.info. It works with all the most popular cryptocurrency exchanges and wallets.
After you determine the total amount lost, you can download IRS form 8949. This is the form you need to submit to report your capital losses. You can also export your data to TaxACT, or TurboTAX.
Cryptocurrency Tax Software vs. Cryptocurrency Accountants
Many cryptocurrency traders hire CPAs that market themselves as “crypto accountants.” However, these accountants usually don’t have much experience with cryptocurrency. Usually, they use tools like CoinTracking and other publicly available crypto tax programs to service their customers. Because these programs are inexpensive and not hard to use, hiring a cryptocurrency CPA doesn’t make much sense. Once you download your IRS form 8949, all you have to do is copy the total provided to IRS form 1040 Schedule D.
If you took bought cryptocurrency late last year or early this year when the price was high, you can recover some or all of your losses by filing a capital loss at tax time. If the loss figure is large enough, you may be able to move into a lower tax bracket. 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. Crypto tax calculators are inexpensive, safe and easy to use.
This is paid content. BTCManager does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can 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 of or reliance on any content, goods or services mentioned in the press release.