The IRS now treats cryptocurrency as property, which comes with some big tax implications. If you sold or traded cryptocurrency last year, here’s how to figure out your crypto tax liability.
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Cryptocurrencies, as a new and emerging asset class, are subject to high volatility. In other words, their prices can go up and down a lot, in a short period of time. For example, Bitcoin (BTC) fell by more than 50% in value, from around $19,000 in December 2017, to below $9,000 in February 2018.
What is a loss?
Cryptocurrencies, like any other investment, can go up or down in value. If the value of your cryptocurrency holdings goes down, you may be able to claim a capital loss on your taxes.
A capital loss occurs when you sell a capital asset for less than what you paid for it. For example, if you bought a cryptocurrency for $1,000 and it’s now worth $900, you have a capital loss of $100.
If you have a capital loss, you can use it to offset capital gains from other investments. You can also carry forward unused losses to offset gains in future years.
What is a write-off?
A write-off is an elimination of an uncollectible account or a reduction in the value of an asset. … When a company writes off an account, it’s removing the value of that account from its books. The account is still owed to the company, but it’s considered uncollectible.
How to calculate your losses
The best way to calculate your losses is by using the realized and unrealized loss calculator. The realized and unrealized gain or loss is the difference between the price you paid for an investment minus the current market value. If you sold your investment, your realized gain or loss would be the difference between the sale price and your original purchase price. Unrealized gains or losses exist on paper only until you actually sell the investment.
To figure out your basis in an investment, add up all the money you’ve invested, including any reinvested dividends or capital gains. When you sell, subtract your basis from the sale proceeds to figure out your gain or loss. If you have a capital loss, you can use it to offset other capital gains on your taxes, up to $3,000 per year. If you have more than $3,000 in losses, you can carry over the excess to future tax years.
What records do you need to keep?
To write off your crypto losses, you’ll need to keep records of your investment activity. This includes records of your purchase price, date of purchase, and quantity of each cryptocurrency you bought. You’ll also need to keep track of any changes in value (basis) for each cryptocurrency. For example, if you bought 1 Bitcoin for $10,000 and then it increased in value to $11,000, your new basis would be $11,000. If you then sold that Bitcoin for $12,000, you would have a capital gain of $1,000.
How to file your write-off
If you sold or traded cryptocurrency during the 2018 calendar year, you may need to report those transactions on your tax return. The IRS has issued guidance (Notice 2014-21) specifying that virtual currencies, such as Bitcoin, are taxable property. As a result, general tax principles applicable to property transactions apply to transactions using virtual currency.
When you sell cryptocurrency, you need to calculate your gain or loss on the transaction. Your gain or loss is the difference between the amount you paid for the cryptocurrency (your cost basis) and the amount you sold it for. If you sold cryptocurrency for more than your cost basis, you have a capital gain; if you sold it for less than your cost basis, you have a capital loss.
If you have a capital gain, you may be able to reduce or eliminate the tax on that gain by taking advantage of one or more of the following “capital loss write-offs”:
-The annual exclusion for capital gains ($3,000 for individuals and $6,000 for married couples filing jointly).
-The lifetime exclusion for capital gains ($250,000 for individuals and $500,000 for married couples filing jointly).
-The IRC Section 1031 exchange rules (like-kind exchange).
-The IRC Section 121 exclusion for gains from the sale of a principal residence.
##Heading: What You Need To Know Before Filing
To take advantage of any of these write-offs, you need to file Schedule D with your Form 1040 individual income tax return. Schedule D is where you report all sales and trades of capital assets during the year. This includes stocks, bonds, mutual funds, real estate, and — as of 2018 — cryptocurrency. Once you’ve determined your gain or loss on each transaction using Schedule D, carry that information over to Form 1040 to calculate your overall capital gains tax liability (if any) for the year.
What if you have a gain?
If you have a gain, you will report it on your taxes as you would any other investment. If you itemize deductions, you can deduct any losses, up to $3,000 per year or $1,500 if you are married and file separately.
What if you have a loss and a gain?
The IRS treats virtual currencies as property for tax purposes. This means that if you sold your Bitcoin or other cryptocurrency at a loss, you may be able to deduct it on your taxes. In order to take a crypto loss deduction, you’ll need to fill out Form 8949 and include it with your Form 1040 when you file your taxes for the year.
If you have a gain and a loss, you’ll need to first calculate your net capital gain or loss for the year. To do this, simply subtract your total losses from your total gains. If you have a net capital gain, it will be taxed at the long-term capital gains tax rate (0%, 15%, or 20%, depending on your tax bracket). If you have a net capital loss, you can deduct it from other capital gains or up to $3,000 of other income (e.g., wages), and carry any remaining lossesforward to future years.
What if you have multiple losses?
If you have multiple losses, you’ll need to fill out Form 8949 for each one. You’ll report your total net capital loss on Schedule D.
If you’ve lost money on your cryptocurrency investments, you may be able to write off the loss on your taxes. In order to do so, you’ll need to file a Form 8949 with the IRS.
Cryptocurrency losses can be written off as either a capital loss or a theft loss. Capital losses can be deducted from other capital gains, or up to $3,000 per year if you don’t have any other capital gains. Theft losses can be deducted from other income, but only if you file a police report and have proof of the theft.
If you’re not sure whether you can write off your crypto losses, talk to a tax professional. They can help you figure out what deductions you’re eligible for and how to file your taxes correctly.