bitcoin tax losses

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?

The Internal Revenue Service (IRS) taxes bitcoin in the same way as property. So you pay tax on gains and losses, like you would for real estate, stocks, or bonds.

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.

Conclusion

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.

bitpay real world bitcoin payments

BitPay, a cryptocurrency payment provider, processed $1 billion in bitcoin and crypto payments in 2018.

Despite the slump in bitcoin price, BitPay topped the $1 billion figure for the second year running. The company also reported a new record for transaction fee revenue.

In a press release, BitPay’s co-founder and CEO Stephen Pair said:

“To process over a $1 Billion for a second year in a row despite Bitcoin’s large price drop shows that Bitcoin is being used to solve real pain points around the world.”

It seems the bear market hasn’t killed demand for real-world cryptocurrency payments.

What is BitPay?

BitPay is a bitcoin payment processor, allowing businesses and vendors to accept cryptocurrency around the world. BitPay facilitates crypto payments in stores, online, and via email billing.

Virgin Galactic uses BitPay to accept bitcoin down-payments on space flights, and Shopify integrated BitPay’s processor, allowing online vendors to accept bitcoin.

BitPay is rooted in bitcoin payments, but also supports Bitcoin Cash and stable coins from Circle, Gemini, and Paxos. Further, the company operates a business-to-business (B2B) service. 

Helping Ohioans pay tax in bitcoin

BitPay made headlines earlier this year by partnering with the State of Ohio. The integration allows businesses to pay taxes in bitcoin, with support for individual taxpayers to follow.

The partnership helped propel BitPay’s B2B service to 255% growth last year. Additional customers include law firms, data center providers, and IT vendors.

“BitPay’s B2B business continues to grow rapidly as our solution is cheaper and quicker than a bank wire from most regions of the world,” Pair said. 

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Stock market

Representatives in Wyoming have introduced a bill that would allow company shares to be issued and recorded on blockchain technology.

House Bill 0185, Corporate Stock-Certificate Tokens, is a cross-party bill put forth by Republican and Democrat representatives in Wyoming. If passed, it would allow stock certificates to be stored digitally on the blockchain rather than paper certificates.

“The articles of incorporation or bylaws of a corporation may specify that all or a portion of the shares of the corporation may be represented by share certificates in the form of certificate tokens.”

The tokenization of traditional assets like stocks, real estate, and even art is a growing presence in the blockchain space. 

Already on the DX.Exchange platform in Europe, you can trade tokens that represent shares in Nasdaq-listed companies. The tokens can also represent a fractional ownership in the the stocks and are backed by real shares held by the exchange’s partner.

The proposal by Wyoming lawmakers would be a significant step further, allowing direct tokenized ownership of shares, issued by the company itself.

The bill proposes a date of July 1, 2019 to enter into effect.

Source: Coindesk

binance-cryptocurrency-exchange-dex.jpg-760x400

Binance has launched a fiat-to-crypto exchange on the island of Jersey, a self-governing dependency of the United Kingdom.

Binance Jersey will target those in the UK and Europe, for the first time offering Binance users a way to purchase bitcoin and ethereum with fiat currency (via pound sterling or euros). The new exchange is entirely separate from the original Binance exchange but it will feel familiar to any current users.

Binance is the world’s largest cryptocurrency exchange by volume but currently only facilitates crypto-to-crypto trades. The new Binance Jersey platform will use the same technology to open up channels for fiat pairs.

As is customary for almost any fiat-to-crypto exchange, registering on Binance Jersey requires a Know Your Customer (KYC) identity check before your account is verified.

Much like Malta, the jurisdiction of Jersey has welcomed cryptocurrency and blockchain projects. The island’s regulator, Jersey Financial Services Commission (JFSC), has previously approved the world’s first bitcoin investment fund as well as offering clarity on initial coin offerings (ICOs) and crypto exchange operations.

Further reading: Best Cryptocurrency Exchanges in 2019 (The Most Comprehensive Guide)

Ethereum Constantinople

Ethereum Constantinople is a hard fork of the Ethereum blockchain designed to lay the groundwork for huge scaling improvements.

Originally scheduled for Wednesday 16th January, Ethereum Constantinople has been delayed by developers. A vulnerability was found in the code that could have been exploited by hackers, putting funds at risk.

In a blog on Ethereum.org, the team explained: “Out of an abundance of caution, key stakeholders around the Ethereum community have determined that the best course of action will be to delay the planned Constantinople fork.”

The delay is temporary while developers work towards a solution.

What is Ethereum Constantinople?

The hard fork is part of Ethereum’s long-term scaling road map. Ethereum has long suffered congestion problems which results in high fees and slow transaction times when the network is busy.

The Ethereum team is working on several scaling projects including off-chain solutions, sharding, and, ultimately, a switch to “Proof of Stake” algorithm. Together, these changes should result in significantly higher speeds and lower costs.

However, upgrading the network while operational is like changing the engine in a moving car. The Ethereum team need to lay the technical groundwork before the big changes can happen.

That’s where Ethereum Constantinople comes in. It implements a series of maintenance upgrades that facilitate enormous scaling in the future.

What’s in the upgrade?

Ethereum Constantinople will implement five ethereum improvement proposals (EIPs).  They are as follows:

EIP 145 – Will result in a 91.4% saving in Ethereum gas costs through more efficient information processing methods. It relates to a process known as Bitwise shifting and requires the introduction of a native operation on the Ethereum Virtual Machine (EVM).

EIP 1052 – Makes it cheaper to process large smart contracts that only require a hash.  More specifically, this functionality returns the keccak256 hash of a contract’s bytecode. It improves upon the design of the EXTCODECOPY opcode.

EIP 1283 – This proposal aims to help smart contract developers by reducing gas costs related to changes made to data storage.

EIP 1014Introduces some off-chain transaction solutions to improve scaling possibilities.

EIP 1234 – Delays the “difficulty bomb” and reduces the mining reward from 3 ETH down to 2 ETH.

Of the proposals above, only the last one is considered controversial. Ethereum’s difficulty bomb is designed to make it progressively more difficult to mine Ethereum. At a certain point, it will become almost impossible, forcing the switch from “proof of work” to “proof of stake.”

The proposal exists to de-incentivize miners by not only making it more difficult to mine but by reducing the reward too.

Despite the controversial proposal, mining pools were generally on board with the upgrade. We were not expecting a contentious fork or competing chains.

Ethereum Constantinople Delayed

On Tuesday 15th January, Ethereum developers announced a delay to the upgrade. The decision involved Ethereum founder Vitalik Buterin and other prominent Ethereum developers.

A new date for the upgrade will be discussed on Friday 18th January. 

A Critical Vulnerability Discovered

A vulnerability was discovered in one of the proposals (EIP 1283) by ChainSecurity, a smart contract auditing company. 

The vulnerability would have enabled a “reentrancy attack” against smart contracts similar to the 2016 DAO hack which saw $70 million in ethereum stolen.  

A reentrancy attack means a manipulative actor could theoretically ask the smart contract to perform a specific function multiple times before the contract is executed or anyone is notified. It means an attacker could keep withdrawing money almost endlessly. 

In a detailed Medium post, Chain Security explains:

“The upcoming Constantinople Upgrade for the ethereum network introduces cheaper gas cost for certain SSTORE operations. As an unwanted side effect, this enables reentrancy attacks when using address.transfer(…) or address.send(…) in Solidity smart contracts. Previously these functions were considered reentrancy-safe, which they aren’t any longer.”

Is Ethereum at risk now?

ChainSecurity concluded that the current Ethereum blockchain is currently at risk:

“A scan of the main ethereum blockchain using the data available from eveem.org did not uncover vulnerable smart contracts.”

At the time of writing, the Ethereum Constantinople upgrade is delayed with a new launch date to be discussed on January 18th.

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