Guest Post by Alex Munkachy
Last week, The Wall Street Journal finance columnist Laura Saunders advised her readers to sell their cryptocurrency assets. The reason: tax deductions.
Cryptocurrency losses count as capital losses. Deducting those capital losses at tax time can help you move into a lower tax bracket. Moving down a bracket can result in thousands of dollars of tax savings.
Filing a capital loss deduction is not as hard as you might assume. Read on to find out how it’s done.
How the IRS classifies cryptocurrency
The IRS categorizes each transaction you make when trading cryptocurrency in one of two ways. Each buy or sell order results in either a capital loss or a capital gain.
If you bought an entire Bitcoin at the beginning of the year when the price was hovering around $10,000 and sold today for $3,700, you would incur a $6,300 capital loss. You can then use this loss to move into a lower tax bracket.
Moving into a lower bracket can save you thousands
If you lost money trading cryptocurrency in 2018, your losses will count against the net income that you earned during the year.
The image below shows the tax brackets that the IRS uses to determine how much you owe. As you can see, the difference between two brackets is quite large. The base rate for single individuals that made between $82,501 and $157,500 is nearly four times the base rate for single people that made between $9,526 and $38,700.
Married people filing jointly can save even more by dropping to a lower bracket.
You can deduct up to $3,000 from ordinary income
The Wall Street Journal recently reported that the IRS allows you to deduct up to $3,000 from ordinary income.
“Losses can offset taxable gains—even on other investments such as stocks or land. Up to $3,000 of losses can also offset income such as wages, and unused losses carry forward for future use.”
That means that if your day job puts you slightly above the limit for your particular tax bracket, deducting your crypto losses can help you drop to a lower bracket. Any losses above $3,000 can be carried over to next year.
There’s no limit to how much you can deduct from income gained from stocks or property sales. That means that if you earned money from selling your home this year, you can use your crypto losses to reduce your tax exposure.
Determining the amount of your loss
If the crypto exchange you use saves a record of your transactions, you may be able to add up these numbers yourself by downloading a CSV file.
Another way to find out how much you can deduct is with crypto tax software. Crypto tax calculators are inexpensive and easy to use.
CoinTracking.info is one of the most popular crypto tax calculators. It can import data from all the most popular crypto wallets and exchanges. The tax calculator feature automatically determines your gains and losses for the year. After you’re finished entering your information, it generates IRS for 8949. This is the form you need to submit with your tax return to file a capital loss deduction.
If you lost money trading cryptocurrency this year, you can save money at tax time by taking a capital loss before the year is out. Once you take your loss, you can submit a capital loss deduction when you file your taxes.
This is a guest post by Alex Munkachy. Alex is a digital nomad and a freelance writer. He currently works at CoinTracking.info and CoinIQ. In his spare time, he likes to listen to music and relax on Spanish beaches.