Have you lost money trading cryptocurrencies this year? Cryptocurrency trading may be risky business. Owing to high volatility and unstable prices of coins, losses are quite common for cryptocurrency traders to incur financial losses during one taxable year. Fortunately, investors in cryptocurrencies are able to deduct their losses from their taxes.
An investor’s tax obligation may be decreased or even eliminated by these deductions, resulting in a tax refund. On your tax payment, you might be able to save tens of thousands of dollars. So, all you need to know about crypto capital losses on your tax return is shown in this comprehensive guide.
Can losses from cryptocurrencies be claimed as a tax deduction?
The IRS treats cryptocurrencies as property and applies capital gains and loss restrictions when determining how much cryptocurrency is taxed. When you incur losses after trading, selling, or otherwise getting rid of your crypto asset, any losses will cancel out your capital gains and up to $3,000 in personal income. To further understand how this works, let’s look at a few things.
How could losses in cryptocurrencies be reported to offset capital gains?
To offset your crypto losses you can factor in your gains and then lower your tax liability. Smart bitcoin traders frequently sell assets at a loss on purpose in order to profit from this strategy. When factoring in your capital gains and losses, pay special attention to the period you had the asset with you. Short-term capital losses cannot be applied to short-term capital gains; only long-term capital losses can be applied to long-term capital gains.
After balancing losses of the same kind, you can use either long- or short-term capital losses against short-term capital profits.
You keep track of your capital losses using a crypto tax tool
Instead of manually registering each bitcoin trade on a spreadsheet, many cryptocurrency investors use crypto tax software to automate the reporting process. The finest software integrates all of your previous trades and links your cryptocurrency exchanges to produce crypto tax reports with just one click. You can use these reports to disclose your cryptocurrency losses on your tax return. For rapid filing, you can even incorporate reports directly into your tax account. FlyFin is one such tax tool, it also features a crypto tax calculator and other 1099 tax calculator and federal income tax calculator to help you find your tax amount.
What are capital gains, both long-term and short-term?
If you keep a certain crypto asset for less than a year, your transaction will be regarded as short-term capital gains. IRS taxes both short-term capital gains and your other income together.
This is the solution to the question, “How much is crypto taxed?” For long-term capital gains the IRS taxes you when you hold a cryptocurrency for longer than a year. The tax brackets rate associated with crypto assets are at 0%, 15%, or 20%. But it also depends on your taxable income and filing status.
The road ahead
Finally, as the complexity of your cryptocurrency portfolio increases, your tax obligations may also get more challenging. So, adhere to the advice above to help you deduct cryptocurrency losses on your tax return. You can also understand tax laws with FlyFin by reading about various forms like the 1040 ES, Schedule C and 1099-K.