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.

finland

Tax authorities in Finland have begun matching bank records to cryptocurrency transactions in an effort to track down suspected Bitcoin tax cheats.

English-language Finnish news outlet Metropolitan.fi reports that Timo Puiro — the tax office’s inspector general — has identified at least 3,300 citizens who owe taxes related to gains accrued while trading cryptocurrencies. Collectively, they owe about 30 million euros in capital gains taxes — a tenfold increase from 2016.

According to the report, the tax office has taken advantage of “generous access” to bank transfers and other financial data, which officials have been able to successfully link to Bitcoin transactions from cryptocurrency exchanges and other trading platforms.

Using this data, the tax office has been able to identify Finns who taxes on their cryptocurrency gains, and it will scrutinize their annual tax returns to determine whether they pay them.

The latest date that taxes can be filed in Finland is May 15, so it is unclear whether residents are paying their cryptocurrency-related taxes.

However, the fact that many cryptocurrency investors do not report cryptocurrency trading on their tax returns is well-documented. US financial services company Credit Karma has said that among users of its tax preparation software cryptocurrency reporting is at “negligible levels,” and the Internal Revenue Service (IRS) has contracted with a blockchain forensics firm in the past to help the agency track down Bitcoin tax cheats.

Cryptocurrency exchange Coinbase was also recently forced by a court order to provide the IRS with access to customer records for high-volume users.

As BlockExplorer reported, tech conglomerate Amazon recently won a patent for a data streaming marketplace that would transmit information in real-time. The company identified catching Bitcoin tax cheats as one potential use case for the marketplace. Under the system, law enforcement agencies could subscribe to data streams for Bitcoin transactions and shipping information or bank records and then use in-app analytics tools to identify correlations in the data.

Featured Image from Pixabay

bitcoin mining

The amount of electricity consumed by bitcoin mining has been grabbing headlines and incurring the ire of environmentalists throughout the nascent technology’s ascendance into the mainstream consciousness. Now, a Silicon Valley legislator says he has found a solution — taxing it.

US Rep. Ro Khanna, a Democrat who represents California’s 17th congressional district, told Business Insider that he believes cryptocurrency miners should have to pay a surtax to account for the environmental impact of their electricity consumption.

“You could have environmental regulations of what could be used or a tax on the use of the mines that are going into the bitcoin, so that if they have externalities that they’re causing the environment, that they have to pay a tax on that,” he said.

The tax, he said, “would provide a disincentive” for people to begin mining. “Just like carbon, you need to have a price on carbon,” he added. “That mining that’s being used for bitcoin, they need to be paying a price on it.”

Of course, as long as the US is regulating cryptocurrency, Khanna says there is no reason legislators should stop at bitcoin mining.

“I think more broadly we need much more regulation, whether it’s against fraud, whether it’s against environmental harms, whether it’s against the use of bitcoin to foster terrorism,” Khanna said. “We need to have much more regulation there and we need to see all the regulations that have come from last hundreds of years for the banks.”

Regulators themselves, however, do not seem to share Khanna’s appetite for adopting a broad framework of cryptocurrency regulations.

As BlockExplorer reported, the chairs of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) recently testified before a US Senate committee that although they believe increased federal regulation of cryptocurrencies may be warranted in some cases, these regulations should be “carefully tailored,” not sweeping rules that fundamentally change the industry.

Notably, Khanna is not the first politician to call for a tax on cryptocurrency mining. After a recent report predicted that more electricity will be used this year in Iceland to fuel cryptocurrency mining operations than to power homes, an Icelandic politician proposed taxing their profits above and beyond the usual rate.

Featured Image from Pexels

coinbase

A U.S. District Court judge has ordered bitcoin exchange Coinbase to provide the Internal Revenue Service (IRS) with the transaction records of more than 14,000 customer accounts.

The ruling (PDF), which was filed in the Northern District of California’s San Francisco courthouse, compels Coinbase to provide the IRS with customer records for accounts that had at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any single year from 2013 to 2015. Coinbase estimates that 14,355 accounts will fall subject to the purview of the summons.

Since the IRS classifies cryptocurrency as property, all cryptocurrency holdings are subject to capital gains taxes at the time of disposition. However, the IRS claims that virtually no U.S. taxpayers have reported bitcoin-related investment income on their annual tax returns. Armed with this data, the agency will be able to identify and levy penalties against investors who have skirted their legal obligations to pay taxes on their bitcoin investments, and — in some cases — prosecute offenders for tax evasion.

“That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains,” U.S. Magistrate Judge Jacqueline Scott Corley wrote in her ruling. “The IRS has a legitimate interest in investigating these taxpayers.”

The ruling did not come as a surprise. Earlier this month, the judge told Coinbase in a hearing that she was inclined to “give tremendous discretion to the agency as to how they investigate” whether people are making money on their bitcoin investments. Following that hearing, Coinbase published a blog post that more or less conceded defeat but took solace in the fact that the company had successfully forced the IRS to narrow its initial summons, which sought records from approximately 500,000 customers.

Despite the narrow focus of the final order, the successful defense of the summons will likely encourage the IRS to ramp up its efforts to bring bitcoin users into compliance with tax reporting obligations — particularly following the industry’s dramatic growth in 2017.

Featured Image from NPR/Dennis Brack/LandovIRS-v-Coinbase-order