The cryptocurrency market performance during 2018 was starkly different to the performance during 2017. Cryptocurrencies across the market underwent steep declines and a lot of investors suffered losses.
However, the losses suffered in crypto may not be all bad. There may be some tax advantages to the losses incurred depending on your jurisdiction and situation. Losses incurred from crypto by those located in the United States (US) can be offset against other income to reduce the taxes owed. With the time for filing quickly approaching, we analyze ways that the losses incurred on crypto investments can be used to offset other income and setup you up for the future.
Firstly, what is the tax situation for crypto in the US?
Cryptocurrencies are considered assets in the US. This means that every trade, whether it be fiat to crypto, crypto to fiat, or a crypto to crypto trade is a taxable event. Each of these trades results in either a capital gain where you sell the cryptocurrency for a higher dollar amount than you purchased it for, or in a capital loss where you sell the cryptocurrency for a lower dollar amount than you purchased it for. Investments held for less than one year are short-term capital losses or gains. This is the nature many trades made by traders of cryptocurrencies and the tax rate for short-term gains can top out at 40.8%. Long-term capital gains – for investments held for over one year – have more favourable rates topping out at 23.8%.
However, with the majority of investors suffering losses on their investments during 2018, no tax will be due on cryptocurrency investments where capital losses were incurred. Investors can still use this to benefit their overall tax situation by using it to offset the taxes paid in other areas such as income from their day job or other investments when filing.
How crypto losses can have a tax benefit.
Tax brackets are categories that individuals fall into where their tax varies based on the amount that they earn. Once you step up a tax bracket, the amount of tax due also jumps. There is a different set of tax brackets for individuals than there is for jointly filing and widowers.
The first step is to calculate the total capital loss from cryptocurrencies. This can be difficult if there are many trades on many different platforms. Having multiple trades on multiple platforms essentially results in multiple ledgers that need to be compiled into one. There are software tools that we will mention below that can assist in this regard.
Up to $3000 worth of losses from cryptocurrency – which fall into the category of capital assets losses – can be deducted from the money you earn at your day-to-day job. If the amount of losses is greater than $3000, up to another $3000 can be deducted from the day job income of the tax filing for the following year. On top of this, there can be an unlimited amount of net capital losses deducted from income received from stocks or from the sale of assets such as property.
What are the tax brackets in the US?
As mentioned, there will are tax brackets for an individual than for a married filing jointly or widowers. The tax brackets for an individual are as follows:
|$0 to $9,525||10% of taxable income|
|$9,526 to $38,700||$952.50 and 12% of the amount over $9,525|
|$38,701 to $82,500||$4,453.50 and 22% on the amount over $38,700|
|$82,501 to $157,500||$14,089.50 and 24% on the amount over $$82,500|
|$157,501 to $200,000||$32,089.50 and 32% on the amount over $157,500|
|$200,001 to $500,000||$45,689.50 and 35% on the amount over $200,000|
|$500,001 or more||$159,689.50 and 37% on the amount over $500,000|
The tax rate for married filing jointly or widowers is as follows:
|$0 to $19,050||10% of taxable income|
|$19,500 to $77,400||$1,905 and 12% of the amount over $19,050|
|$77,401 to $165,000||$8,907 and 22% on the amount over $77,400|
|$165,001 to $315,000||$28,179 and 24% on the amount over $165,000|
|$315,001 to $400,000||$64,179 and 32% on the amount over $315,000|
|$400,001 to $600,000||$91,379 and 35% on the amount over $400,000|
|$600,001 or more||$161,379 and 37% on the amount over $600,000|
Offsetting net capital losses against day job income can serve to bring investors into a lower tax bracket category.
With each trade being a taxable event, filing taxes can quickly get complicated for active traders who have completed not only multiple trades but also with multiple different cryptocurrencies pairings and exchanges. There are tools which can assist in helping traders file their taxes such as cointracking.info. Cointracking.info integrates with different exchanges to import the trading history and compile a master ledger.
Coinbase exchange has also integrated with TurboTax to help investors file their taxes. There are also other tools to help with taxes such as cryptotaxtrader.com and bitcoin.tax. It is understandable if all this is confusing. Taxes are notorious for being difficult to understand. If you are willing to pay for more premium services to have it properly organized, there are services such as cryptotaxprep.com that can facilitate this.