The year 2022 wasn’t the best for cryptocurrencies, to put it mildly.
Around 60% of Bitcoin’s value was lost last year, and many other cryptocurrencies suffered comparable losses. Knowing a few crypto tax strategies can help you save money if you intend to continue investing in virtual currency, stocks, or other securities in the future, even though the window for reporting cryptocurrency losses for the 2022 tax year has passed.
One method, referred to as “tax loss harvesting,” enables you to claim capital losses from investments, real estate, or cryptocurrency from your taxes in order to reduce the amount of tax you owe on profits in subsequent years. When properly recorded, capital losses can reduce your taxable income for the year by up to $3,000 and any capital gains income you received in the same year. If your overall losses are more than $3,000, you can carry the remaining amount forward to tax returns for subsequent years. We like this since it may reduce your taxable income and possibly even your tax obligation.
Harvesting tax losses has some restrictions. Only until the loss has been “realised,” or after you’ve sold your coins, you can deduct capital losses from your cryptocurrency holdings. Whether you’ve owned a coin for more than a year or not affects the tax rate as well. Yet, given the number of sector scandals that occurred last year, many investors who are waiting on big losses might just prefer to sell their assets and move on. If you choose to do this, be aware that you may be able to “harvest” your losses and save paying some taxes in the future.
Here is some additional information on how tax loss harvesting for cryptocurrency investors works as well as some advice from qualified professionals.
How your crypto is classified and taxed by the IRS
According to Ryan Losi, executive vice president and certified public accountant of the accounting company PIASCIK, the IRS views cryptocurrencies as property rather than securities. According to Losi, “the IRS has specifically said in 2014 and subsequent notices not to classify [crypto] as a security, but rather as a property.
A capital gain occurs when you sell a house or other asset for more money than you bought for it; this additional money is then liable to capital gains tax. Depending on how long you held the asset, this tax rate changes. A short-term gain is one that is taxed at the same rate as your income tax if you held the asset for less than a year.
In contrast, the IRS refers to this capital gain as a long-term gain if you held your assets for more than a year and will tax you for the 2022 tax year at one of three rates.
- Your capital gains tax rate is 0% if your taxable income was $41,675 or less.
- The rate is 15% if your taxable income fell between $41,676 and $459,750.
- The rate is 20% if your taxable income was greater than $459,750.
None of the higher rate exceptions listed by the IRS presently apply to cryptocurrencies.
Then there are losses of capital. When you sell an asset for less than you purchased for it, you suffer a capital loss. Many investors who have held bitcoin from the beginning of last year are probably currently sitting on a sizable capital loss. If you sell your cryptocurrency at a loss, the loss can be applied to other capital gains in the current tax year and possibly in the following ones as well. Up to $3,000 of your capital losses (or $1,500 if you’re married, filing separately) may be subtracted from your taxable income if they outweigh your gains. Any remaining unapplied losses may also be carried over and used in a subsequent tax year.
Can you sell coins, file a loss claim, and then buy them again immediately away?
In theory, absolutely. This is one benefit of the IRS treating cryptocurrency as a property as opposed to a stock.
According to the IRS’s “wash sale rule,” investors cannot deduct losses from their taxable income as capital losses if they sell a security at a loss and then buy another that is “substantially identical” within 30 days of the sale. Consider this the IRS’s attempt to deter people from manipulating the tax loss harvesting procedure by preventing a large number of transactions (and ensuing market instability).
But, as of the time of writing, the wash sale regulation does not apply to cryptocurrencies. Cryptocurrency is not regarded as a security up until their definition is expanded by Legislation, according to Losi. If you’re now enjoying the crypto slump, selling your coins and then repurchasing them at a later time is legally permissible for the time being and would allow you to realize the loss for tax reasons. However, you can’t claim a capital loss until it’s realized.
According to Christian Rivera, CPA and CEO of The Ecommerce Accountants, an accounting firm, the method is important enough that some crypto software providers offer a mechanism to automate tax loss harvesting. Some investors use software programs like TaxBit to keep track of their investment’s basis. Your actual gains or losses are those. The software can trigger those trades if you have realized gains but unrealized losses as well, allowing you to cash out on losses and avoid being trapped in a sizable taxable position “explained Rivera.
If you want to use a tax loss harvesting approach frequently, speak with a tax expert.
Claiming cryptocurrency losses on your taxes
You must first indicate on Form 8949 whether your crypto losses were short-term or long-term before you may claim them. If you also have capital gains in the same tax year, the kind of loss will matter, according to Eric Bronnenkant, CPA and head of tax at financial advisory firm Betterment. The kind of your loss “may have an influence on the net tax that you pay if your gains surpass your losses,” Bronnenkant added. If you intend to carry the loss over to subsequent tax years, the type of loss will also be important.
Your Schedule D, which determines your overall net capital gain or loss, will then include Form 8949. Then, you’ll include Schedule D with your Form 1040. If you utilise a cryptocurrency exchange, make sure to check to see if they’ve provided you with a form, like a 1099-MISC, so you can compare data.
Knowing that you might have to pay for a higher grade of service in order to report cryptocurrency activity is important if you’re utilizing tax software to submit your taxes this year.
Get a tax benefit by using your cryptocurrency losses
The market for cryptocurrencies is still unstable and subject to governmental scrutiny. You’ll be better prepared to file your taxes and save money if you understand the rules for claiming capital losses.