Do I Need To Report My Capital Losses
Remember, itâs important to include any cryptocurrency capital losses that youâve incurred during the tax year in this section. After all, every taxable event must be reported to the IRS.
Thereâs also a tax benefit to reporting capital losses. Capital losses can offset your capital gains and up to $3000 of personal income.
For more on this subject, check out our complete guide to tax-loss harvesting.
Report Your Crypto Losses On Irs 8949 Tax Form
In 2014, the IRS issued Notice 2014-21, clarifying that virtual currency is treated as property for tax purposes and every taxable event must be reported on an IRS 8949 cryptocurrency tax form, similar to the sale of stock.
As a refresher on cryptocurrency tax reporting, the most common taxable events include:
- Selling your crypto for cash
- Trading one cryptocurrency for another digital currency
- Using cryptocurrency at a merchant as payment
For each bitcoin transaction or other virtual currency transaction, be sure to include the name of the cryptocurrency, the dates you acquired and disposed of the cryptocurrency, your cost basis and proceeds, and your net capital gain or loss.
Youll then need to transfer the totals over to Schedule D, the supporting schedule of Form 1040 where you report your total capital gains and losses for the tax year. For a step-by-step walkthrough of this process, check out our blog on How to Report Cryptocurrency on Taxes.
An Overview Of Crypto Taxes
Death and taxes are said to be the only things you cannot escape in life. When the latter is mixed with the world of cryptocurrency trading and investing, things can quickly become confusing and unclear.
In this article, we break down the fundamentals of cryptocurrency taxes for our traders that reside in the U.S. We discuss how the asset class is treated from a tax perspective and also outline the process for properly reporting the gains, losses, and income associated with your crypto trading activity.
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How Does The Gst/hst Apply To Cryptocurrency
Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
If your business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.
Keep all records that show how you calculated the fair market value.
Do I Have To Report A Capital Gain Or Loss If I Buy Something With Cryptocurrency
Yes. When you use your virtual currency to make a purchasebig or smallthe IRS considers it a taxable event. Heres an example of how it works:
Lets say you receive $500 worth of cryptocurrency from a client on July 1. Six months later, on December 1, the fair market value of the currency has increased to $1,000, and you decide to spend that on a new computer.
In this example, two taxable events occurred:
Now, when you file your tax return, youll report the $500 you received from your client as ordinary income. Then, youll report a short-term capital gain of $500* because the currency increased in value.
*After you received the payment from your client, you held onto the cryptocurrency for six months. This allowed it to increase in value by $500. As long as you were holding it, the cryptocurrency was not taxable. But when you bought the computer, that created a taxable event, so youll report your $500 gain.
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Can You Claim A Capital Loss If You Havent Sold Your Crypto
Remember, you need to actually realize your loss for it to count as a capital loss that can be written off on your taxes. To realize a loss, you must incur a taxable eventâin other words, you need to actually dispose of your crypto to realize the loss.
Examples of disposals include the following:
- Trading or selling crypto for fiat currency
- Trading one crypto for another cryptocurrency
- Spending crypto to buy a good or serviceâ
That means that if youâre simply holding your cryptocurrency, you will not be able to deduct any losses. You will only be able to report your losses once a taxable event occurs.
Include Totals From 8949 On Schedule D
Once your 8949 is filled out, take your total net gain or net loss and include it on Schedule D.
Schedule D allows you to report your overall capital gains and losses from all sources. In addition to your short-term and long-term gains that come from 8949 and your crypto activity, other line items reported on Schedule D include Schedule K-1s via businesses, estates, and trusts.
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Guide For Cryptocurrency Users And Tax Professionals
Cryptocurrency is a relatively new innovation that requires guidelines on taxation so that Canadians are aware of how to meet their tax obligations. The Senate reviewed the issue of taxation on cryptocurrency in 2014 and recommended action to help Canadians understand how to comply with their taxes, which the Canada Revenue Agency is doing by presenting this guide.
Reporting As Either Income Or Capital Gain
Generally, if disposing of cryptocurrency is part of a business, the profits you make on the disposition or sale are considered business income and not a capital gain. Buying a cryptocurrency with the intention of selling it for a profit may be treated as business income, even if its an isolated incident, because it could be considered an adventure or concern in the nature of trade.
If the sale of a cryptocurrency does not constitute carrying on a business, and the amount it sells for is more than the original purchase price or its adjusted cost base, then the taxpayer has realized a capital gain.
Capital gains from the sale of cryptocurrency are generally included in income for the year, but only half of the capital gain is subject to tax. This is called the taxable capital gain. Any capital losses resulting from the sale can only be offset against capital gains you cannot use them to reduce income from other sources, such as employment income. You can carry forward your capital losses if you do not have any capital gains against which to offset those losses for the year or any of the preceding three years.
For more information on capital gains, see Guide T4037, Capital Gains.
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Get Started With Cryptocurrency Tax Software
Thereâs no need to fill out your tax forms by hand. Today, more than 100,000 cryptocurrency investors use CryptoTrader.Tax to file their tax return in minutes.
With a few clicks, you can select each exchange you’ve used and import all of your historical transactions.
Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA, or tax attorney on how you should treat the taxation of digital currencies.
Reporting To The Irs`
You might wonder how to report your Bitcoin or other cryptocurrency transactions on your annual tax return.
The basic tax rules that are applicable to property transactions apply to transactions using virtual currency. The IRS has made it clear that Bitcoin is a type of property and your transactions must be reported.
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Earning Cryptocurrencies Through Mining
Cryptocurrencies are commonly acquired in two ways:
- bought through a cryptocurrency exchange
- earned through mining
Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. Miners will include cryptocurrency transactions into blocks, and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrencys network and becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two payments in a single payment amount. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.
The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.
Can You Write Off Crypto Losses On Taxes
Yes. Cryptocurrencies such as bitcoin are treated as property by the IRS, and they are subject to capital gains and losses rules.
This means that when you realize losses after trading, selling, or otherwise disposing of your crypto, your losses offset your capital gains and up to $3000 of personal income.
Any net losses exceeding $3000 can be rolled forward into future tax years.
To better understand how this works, letâs explore a couple of examples.
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How Do I Calculate My Crypto Losses For Taxes
To calculate your total losses:
- First, find the net total of your long-term gains and losses, including those on any non-crypto assets
- Then, find the net total of your short-term gains and losses, including those on any non-crypto assets
- Finally, find your overall capital gains or losses by calculating the net total of the long-term gain/loss and short-term gain/loss
If you have a net loss among all capital assets, then you can deduct up to $3,000 of those losses and carry forward additional losses to offset future capital gains.
Calculating these losses and deductions can be difficult if you have a large or complicated portfolio. However, crypto tax software can make this process significantly easier.
Different Crypto Loss Scenarios
When it comes to deducting or filing cryptocurrency losses, different situations apply to different tax rules within the U.S. The most common forms of cryptocurrency losses that we see here at CryptoTrader.Tax are listed below:
Each scenario of cryptocurrency loss will fall under one of these three classifications: Casualty loss, theft loss, or investment loss. It is up to YOU how you want to handle and report your losses. The three categories are explained further below.ââ
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Reporting Stolen Or Lost Cryptocurrency For Tax Purposes
Losing crypto from exchange shutdowns, wallet hacks, scams, and other events are unfortunately common in the world of cryptocurrency today. From a tax perspective, these events are not all treated the same, and it largely depends on the specifics of the circumstances. This guide walks through the most common forms of theft and crypto losses and the possible ways to treat them from a tax perspective in the U.S.
Disclaimer: This post is for informational purposes only and should not be construed as tax, legal, or investment advice. The area of cryptocurrency taxation is constantly evolving and is not black and white. Please speak to your own tax expert, CPA, or attorney on how you should treat taxation of digital currencies.
Note – if your cryptocurrency simply went down in price prior to selling it, this is considered a capital loss or an investment loss. This is different than some of the losses we discuss below. For more detailed information, please read our guide on how to deal with capital losses for your cryptocurrency.
Complete Irs Form 8949
IRS Form 8949 is used for reporting the sales and disposals of capital assets. Some examples of capital assets include stocks, bonds, and yes, cryptocurrencies.
While youâll need to report your capital gains and capital losses on Form 8949, youâll also need the following information on each individual transaction:
- A description of the property you sold
- The date you originally acquired the property
- The date you sold or disposed of the property
- Proceeds from the sale
- Your cost basis for purchasing the property
- Your gain or loss
Want a demonstration of how to fill out Form 8949? Check out the video below.
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Can I Write Off Lost Or Stolen Cryptocurrency
Occasionally, investors may lose cryptocurrency due to events such as a hack or a lost wallet key.
After the Tax Cuts and Jobs Act of 2017, these types of casualty and theft losses are no longer considered tax deductible.
For more information, check out our guide to reporting lost or stolen cryptocurrency.
How To Report Cryptocurrency On Your Taxes In 5 Steps
Not sure how to report your cryptocurrency taxes?
Youâre not alone. As cryptocurrency is still a relatively new space, itâs not always easy to find tax professionals with expertise on the subject.
To help investors like you, we simplified cryptocurrency tax reporting into an easy-to-follow 5-step process. By the time you finish reading, youâll understand how to report all of your crypto transactions on your tax return.
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How Do I Report Bitcoin Or Other Cryptocurrency As A Capital Gain
Reporting cryptocurrency is similar to reporting a stock sale. You’ll need to report your cryptocurrency if you sold, exchanged, spent or converted it. When it comes to hard forks and airdrops, you only have taxable income if it results in new cryptocurrency.
You have to do this for every trade you made. If you bought coins at different prices or sold partial amounts, then you have to keep track and record the difference of what you sold. Cryptocurrency exchanges aren’t required to provide a 1099-B or summary tax statement for cryptocurrency transactions.
You may receive various types of forms, including a 1099-K, 1099-B, and/or a gain and loss report.
Its your responsibility to keep records of your transactions. The most common way to do this is to download your order or trading history from your exchanges website. You may need to do this a few times throughout the year due to limits on how far back you can get information.
Once you have your figures:
There’s an upload limit of 4,000 cryptocurrency transactions in TurboTax. If you have more than that, youll need a transaction aggregator. Well walk you through that in the cryptocurrency section.
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Crypto Tax: How To Report Your Virtual Currency
If youve received, mined, invested, or simply taken an interest in virtual currencies, its important to understand how these transactions affect your taxes. Weve outlined the rules for reporting your cryptocurrency, determining fair market value, calculating capital gains and losses, and more in this article.
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Keeping Books And Records
If you acquire or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, we suggest that you export information from these exchanges periodically to avoid losing the information necessary to report your transactions. You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.
You should maintain the following records on your cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party
- the exchange records
- the software costs related to managing your tax affairs.
If you are a miner, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation
- the mining pool details and records
For more information, please review our link on keeping records.
Offset Capital Gains With Your Cryptocurrency Losses
As mentioned earlier, cryptocurrency losses can be used to offset capital gains and lessen your tax burden. In fact, savvy crypto traders often sell assets at a loss intentionally to offset capital gains with a strategy called crypto tax-loss harvesting.
When offsetting your capital gains with losses, pay attention to the holding period of the assets. You are only allowed to offset long-term capital losses against long-term capital gains and short-term capital losses against short-term capital gains. Once youve offset losses of the same type, you can then use either long-term or short-term capital losses against short-term capital gains.
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Why Reporting Capital Losses Is Difficult
If you have been trading frequently, calculating your losses for each of your cryptocurrency trades and reporting them on your taxes can be quite tedious.
After all, crypto exchanges like Coinbase and Binance have trouble providing gains and losses reports to customers. This problem occurs due to the technical nature of cryptocurrencies and their interoperability. When a customer transfers crypto from one wallet to another, exchanges wonât necessarily know the customers original cost basis for the coin that was transferred in.
As a result, itâs very difficult for exchanges to accurately calculate capital gains and losses. Thatâs why investors are increasingly turning to crypto tax software to aggregate complete transaction history from all platforms.