After Bitcoin almost reached $20,000 per coin at the end of 2017, many hoped for a similar bull run as 2018 comes to an end. Unfortunately, it seems like there may be a cryptocurrency crash looming, as Bitcoin has now reached below $4,000 per coin. The sudden drop in cryptocurrency prices is causing many people who invested in these coins significant losses on their investments. It is currently not known if cryptocurrencies will still make a comeback shortly, or if the fall in prices will remain.
The fact that the fall in cryptocurrency prices has caused many people to suffer losses is not all negative. Due to the losses imposed by the crash that we are facing as we are heading toward the end of the year, people can implement certain strategies when it comes to their tax return to save on the taxes that they will need to pay. Since cryptocurrency is considered property by the IRS, individuals who have lost money might be able to offset some of the taxes that they would need to pay for capital gains on non-cryptocurrency such as in the stock market that hit its peak recently.
How To Reduce Your Tax Bill By Reporting Cryptocurrency Losses
The IRS has reported on multiple occasions that it is keeping its eyes on cryptocurrency investments and trades made by the American population, and has requested that such gains and losses be filed in tax reports.
While it is important that cryptocurrency gains be reported and that appropriate tax fees are paid on such profits made by the general population, it is important not to overlook the impact that losses in cryptocurrency investments may also yield on a tax bill.
The IRS has officially revealed that up to $3,000 in total may be deducted due to capital losses induced by the sudden crash in cryptocurrency prices. When cryptocurrency losses exceed the $3,000 limit, the taxpayer will be able to obtain a deduction of $3,000 on their reported income, including their standard salary income from a day job, and the remaining amount will then be carried over and deducted from the income reported on the following year’s tax return. This is also known as a capital loss carryover.
An IRS 8949 form should be completed in order to report cryptocurrency gains and losses. Each trade that was made during the tax year will need to be reported on this particular form in order to accurately report cryptocurrency investments and transactions to the IRS.
Every transaction needs to be reported with full details, including:
- Cryptocurrencies that were traded, such as Bitcoin or Ethereum
- The price at which the trade was initiated
- The date that the trade was initiated
- The trade’s overall cost basis
In addition to reporting such data, taxpayers also need to add in the loss or gain they experienced in each of these transactions.
At the bottom of the form, the taxpayer will be able to calculate their total losses or profit gains for the tax year. This would equal the amount that would be taxed or the amount that will be deducted from other income sources that the taxpayer will be filing on their tax return.
Many cryptocurrency traders find themselves making a significant number of trades during a single tax year. This could make reporting gains and losses more difficult, which is where software applications may come in handy. These software suites can be utilized to assist in reporting cryptocurrency transactions and will assist in completing the IRS 8949 form.
While it is important to report losses suffered due to the fall in cryptocurrency value this year, taxpayers should be wary as the IRS may become suspicious if this is the only year where cryptocurrency investments were reported. Taxpayers who have had gains in previous years are advised to amend the affected tax returns in order to ensure they are not investigated.
While the cryptocurrency crash has caused many people to suffer great losses due to investments they have made in Bitcoin and other digital coins, reporting these losses during your next tax return may nevertheless yield some positive effects. Net losses as a result of the fall in cryptocurrency prices up to the value of $3,000 can be filed in your tax return and may be deducted from other income that you have gained during the tax year.