How to Write Off Crypto Losses at Tax Time

2018 was a rough year for cryptocurrency traders– but there is a bright side to the current state of the markets. Tax time is coming up, and the IRS lets you write off cryptocurrency losses as capital losses. Read on to find out everything you need to know before you file.

It’s not as complicated as you think

Filing your crypto losses isn’t as difficult as one might assume. The IRS categorizes each transaction you make in one of two ways.

Capital gain. If you sell your crypto for a profit, the transaction is considered to be a capital gain.

Capital loss. Likewise, a capital loss results when you sell your crypto for less than what you paid for it.

One important thing to know before you file is that the IRS doesn’t take your loss into account unless you sell. Once you sell, you can register your loss as a capital loss. If you sold your cryptos for a loss last year, you can write off that loss when you file your 2018 taxes. If you sell now, you’ll have to wait until next year to file your losses.

Deductions, explained

The New York Times recently explained how crypto loss deductions work in an article published in January:

“As on the stock market, losses can be used to offset capital gains, subject to certain rules, and losses that are not used to offset gains can be deducted—up to $3,000—from other kinds of income. Unused losses can be carried over to future years.”

In other words, the IRS lets you subtract up to $3,000 from your taxable income if you took a loss trading crypto. You may even be able to deduct more if you mined cryptocurrency.

According to a notice that the IRS published 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.”

In an interview with Brave New Coin, Jeff Vandrew, an Attorney, a Certified Public Accountant, and a CFP, provided some additional information about how mining applies to taxes:

“If you are engaged in mining cryptocurrency, so long as you are doing it on a continuous basis with the expectation of profit, it probably qualifies as a “trade or business.” If you qualify, this would allow you to take the generous Section 179 deduction, which allows you to write off the full cost of any specialized hardware you may have purchased.”

How to find out how much you can deduct

In the early days of cryptocurrency, traders had to use spreadsheets to keep track of each transaction. Now, there is software that can do all the math for you.

CoinTracking.info – one of the most popular cryptocurrency tax tools — supports CSV, TaxACT, and TurboTax. There’s also an automatic import feature that can pull your transaction data from a wide variety of different wallets and exchanges.

After you complete the setup process, you can download IRS form 8949. This is the form you need to submit to the IRS to report your capital loss.

Summary

There is one upside to 2018’s bleak cryptocurrency markets: tax deductions. The IRS will let you deduct up to $3,000 from your income when you file.

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