Amidst a dreadful year for crypto investors, a significant upside to the dismal performance of their assets could be that the losses could end up saving them a significant amount of tax if they understand how to record and file appropriately. Under the U.S. tax code, bitcoin investors who got “rekt” in 2018 can use these losses to mitigate their tax burden for the current financial year and beyond.
Key to this is the fact that the United States Internal Revenue Service (IRS) classifies cryptocurrency as a commodity rather than currency, and so crypto trading transactions are taxed in a manner similar to how sales of stocks, land and similar assets are treated.
Favourable IRS Regulations
The tax that is relevant to this asset category is Capital Gains Tax, which goes up to 40.8 percent for short term gains and 23.8 percent for long term gains. It is levied whenever an asset is sold for more than what the holder purchased it for. In other words, if an investor bought 10 BTC a couple of years ago at $1,500 each and they decide to sell at $4,000 each in 2018, a capital gains tax will be levied on the $25,000 profit they would realise.
The flipside is that under the IRS form 8949 reporting framework, if cryptocurrency assets end up being sold at a loss, the loss amount can be claimed against their total capital gains tax burden for all commodity investment activities as well as their personal income tax (up to a limit of $3,000 per financial year in the case of the latter). Investors can also carry these losses forward to the next financial year and offset their tax burden in the case of personal income tax.
Even more significantly, crypto assets are not subject to “wash sale” regulations which prevent investors from purchasing securities within 30 days of disposing of a loss-making asset. This means that it is perfectly legal for an investor to sell a portion of their crypto holdings, record the loss on the IRS form 8949 for tax purposes and then repurchase it shortly after, usually within as little as a few hours.
In order to benefit from the advantages offered by this framework, it is important for investors to keep detailed and accurate records of all their cryptocurrency trading activity in a financial year, which can be done using one of a burgeoning number of crypto accounting software solutions in case the investor is unable to realistically record everything manually.
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