Turning 2019 Crypto Losses into Tax Savings — A Complete Guide

The IRS is starting to enforce cryptocurrency taxation much more strictly. In the past six months, the agency has sent out more than 10,000 warning and action letters to cryptocurrency holders and traders alerting them of their tax liability. The IRS has also completely updated its tax guidance on cryptocurrency the past month in October of 2019.

One area of crypto tax that is often overlooked is that you can actually write off your losses and thus save money on your tax bill. This article will discuss this option that many traders are taking advantage of.

Losses on crypto offset other types of capital gains

As outlined by the IRS, Bitcoin and other cryptocurrencies should be treated as property for tax purposes. This means that you incur capital gains and losses when you sell/trade your crypto for more or less than you originally acquired it for. This is also how other forms of property like stocks and bonds are treated. When traders incur capital gains, they owe a tax on that gain to the government. However, when they incur a capital loss, that loss can be used to reduce or offset gains from other trades or even gains from the sale of other forms of property.

In the crypto landscape we are currently experiencing, there are plenty of losses to go around. Smart traders will file these capital losses with their yearly tax return to reduce their taxable income for the year.

Up to $3,000 of net capital losses can be deducted against other types of income

Whenever your total capital gains and losses for the year add up to a negative number, you incur a net capital loss. If the net capital loss is less than or equal to $3,000 ($1,500 if you are married and filing a separate tax return), then that entire capital loss can be used to offset other types of income--like the income from your job.

If your losses exceed $3,000, then the amount over $3,000 will be rolled forward to the next tax year.

An example

Imagine you started 2019 doing well with your crypto trading. You bought $3,000 worth of Bitcoin and Ethereum and turned that into $8,000 through many different cryptos and many different trades. Once August rolled around and the markets took a turn for the worse, you were hit hard and the value of your portfolio dropped significantly. You ended up selling out of all of your positions and walked away with just $1,000. You incurred a net loss of $2,000. Because this net loss is less than $3,000, the entire loss would be deducted from your taxable income for the year. If you made $50,000 for the year in regular income, only $48,000 of that income would be taxable. Depending on how heavy your losses are, you could be saving a significant amount of money by properly filing your losses--especially if you have other capital gains to offset from a traditional stock portfolio.

What if I’ve made hundreds of trades?

A lot of cryptocurrency investors trade quite often or utilize automated trading strategies. If you haven’t been keeping a record for the dates of your trades, the US dollar value amounts that you bought and sold your crypto for, and the capital gains/losses from those trades, this reporting process, and creating your 8949 form can become a headache for those with many trades. If this is a scenario that you are facing, it could be worthwhile to leverage free crypto tax software to automatically generate your reports for you.

Should I hire a crypto specialized tax professional?

Many traders are reaching out to expensive “crypto accountants” to help create their tax forms for them and to handle the entire crypto tax filing process. While having a solid tax professional is important, most of the CPA firms use the same automated crypto tax services to do the intense capital gains and loss calculations that you would use doing it yourself. They simply charge the customer a premium on top of this. Do your research before forking over hundreds of dollars. One option is to create your crypto tax reports yourself with the use of tax software and then bring these reports to your tax professional. Be aware, everyone’s situation is unique, and at times it can definitely be worthwhile to work with a professional.

Cryptocurrency Tax Software Options

• CryptoTrader.Tax

CryptoTrader.Tax automates the entire cryptocurrency tax reporting process. Simply import your trades and transactions into the platform and generate your necessary tax reports with the click of a button.

The company partnered up with Intuit TurboTax to allow cryptocurrency traders to seamlessly be able to include their cryptocurrency tax reports with their entire tax return in the TurboTax platform. Reports can also be exported into TaxAct or sent to your tax professional

• ClearTax

ClearTax is another option for cryptocurrency traders who want to be filing their taxes. The platform is much more expensive than other options on the market, but offers similar useful features. You will be required to sign up using your email address. Upon signing in to your account you will be directed to the tax calculation page, on this page, you will need to follow steps to create a tax report. Clear Tax offers features for a variety of cryptocurrency traders.

• ZenLedger

ZenLedger is another alternative where you can pay a Tax professional to help with your return. ZenLedger supports a number of different exchanges and platforms. You can import your trades, discuss with a tax pro, and have them file your tax return.

• Bitcoin Taxes

Bitcoin Tax is a legacy option for quickly calculating your crypto gains and losses calculations. The website is one of the earliest solutions on the market. Bitcoin tax allows traders to create an account for free and begin importing their transactions. With just a few additional steps, you can have generated tax reports that you can give to your accountant to file on your behalf.