2018 was a bruising year for bitcoin with the cryptocurrency falling 72%. A lot of traders and investors are in the red and may have sold their bitcoin at a loss. If that sounds like a familiar story, there is a small silver lining: bitcoin losses are tax deductible. You can claim bitcoin losses on tax under certain circumstances.
CreditKarma recently reported that American investors lost $1.7 billion by selling bitcoin last year. But only half plan to report those losses to the tax man.
Many Americans may not realize they could save money by deducting their bitcoin losses. More than that, failing to report those losses “could lead to an audit and having to pay penalties and interest” according to CreditKarma.
So, let’s run through everything you need to know about reporting bitcoin losses.
Note: this bitcoin tax guide is written for US taxpayers. For those in other jurisdictions, please contact a tax expert in your area.
Do you have to report bitcoin on taxes?
First, let’s go back to the beginning: bitcoin is subject to tax. Not a lot of people realize this, as evidenced by the fact that only 800 taxpayers per year stated their bitcoin gains between 2013 to 2015.
So, yes, you do have to report bitcoin gains and losses on your tax files.
How is bitcoin taxed?
It’s a confusing system considering bitcoin is a form of currency, but that’s how it works.
Firstly, tax only comes into play if you’ve realized a gain or loss. In other words, if you’ve sold, traded, or spent your bitcoin.
For example, if you bought bitcoin at $100 and sold it at $1,000, you owe tax on the $900 gain.
But if you’re a die-hard hodler who bought bitcoin and never sold it, you can leave this page. There’s no tax for you until you sell it.
The tricky (and ridiculous) thing about this system is that you owe tax if you spend bitcoin. Even if you buy a coffee with bitcoin, you need to record that transaction and figure out if there was a loss or gain.
Note: There are software platforms that will track your trades and spending to figure this all out for you.
How much tax do you pay on bitcoin?
That depends on your tax bracket and how long you’ve held the cryptocurrency.
Bitcoin is subject to short-term and long-term capital gains.
Short-term gains – if you’ve held bitcoin for less than a year at the time of selling, the tax falls under ordinary income, in your particular income bracket.
Long-term gains – if you’ve held bitcoin for longer than a year, it falls under the long-term capital gains rate. It’s a lower tax rate, but still dependent on your income bracket.
By the way, we went deep into the topic of bitcoin taxes in this article if you’d like more information.
Bitcoin losses are tax deductible
Because bitcoin is subject to capital gains, you can also deduct any losses.
Let’s say you bought one bitcoin at $10,000. You sold a few months later at $7,000, incuring a $3,000 loss. You can claim that bitcoin loss on your tax forms and it will lower your tax obligation.
You can also include transaction fees in your calculations.
In this case, because you held for less than a year, it falls under short-term losses. You can deduct that against any other short-term gains that year. If you have no short-term gains at all, you can still deduct the loss.
However, there’s a $3,000 limit on total losses. Any more than that and you can roll it over to the next year and deduct against any future gains.
If you held bitcoin for longer than a year, you can deduct the loss against any long-term capital gains. And, like before, if you have no long-term capital gains, you can simply deduct the loss. The same $3,000 limit and rollover rules apply.
Bitcoin taxes can be a tricky thing to get your head around. But you can claim bitcoin losses on your tax return which is a small benefit of the tax system.
Disclosure: I am not a tax advisor and you should contact a qualified tax attorney or account, preferably one knowledgable in cryptocurrencies. A list of such individuals is available here.