Cryptocurrency and Taxes: How to Use 2018’s Losses to Your Advantage

Taxes have been a hot topic in the cryptocurrency world this year. Many countries have been trying to figure out how to tax crypto assets, while traders have been figuring out how to lever them to write off losses. As bitcoin and other cryptocurrencies enter the mainstream, tax reduction strategies are starting to emerge.

Governments Belatedly Address Bitcoin Taxation

At the beginning of the year, U.K. Prime Minister Theresa May said her government would be looking at bitcoin and cryptocurrencies “very seriously” because of their potential to be “used by criminals.”

Elsewhere in Europe, the European Union has been advised to devise common cryptocurrency rules – and that includes tax. While Switzerland has decided to do away with regulation, the Swiss Federal Council has stated that it wants “the best possible framework conditions so that Switzerland can establish itself and evolve as a leading, innovative and sustainable location for fintech and blockchain companies.” In Russia, while the government is working out a regulatory framework, citizens are obliged to pay 13 percent tax on their crypto-related incomes.

Taxation guidelines in the U.S. have generally been unclear. On Dec. 21, lawmakers filed a bill to create tax exemptions for certain cryptocurrency transactions. The state of Ohio also said it would accept BTC from its citizens to pay taxes.

Meanwhile, South Africa’s government, generally considered to be crypto-friendly, this year said income accrued from crypto transactions must be declared – and said it would be cracking down on tax-dodging cryptocurrency traders.

How Cryptocurrencies Can Help You Save on Taxes

While governments are figuring out how to tax cryptocurrencies, there are actually ways in U.S. citizens can use them to their advantage to pay less taxes.  This is due to a 2014 notice by the Internal Revenue Service (IRS) which treats cryptocurrencies as an investment property, rather than a currency. Whenever you trade cryptocurrency, the transaction is either a capital gain (where you make money) or a capital loss (where you lose money). And any losses this year could ultimately place you in a lower tax bracket.

The IRS allows taxpayers to deduct $3,000 in capital losses for any given year from money earned from a day job. Losses beyond that cannot be deducted until several years later.

As an example, let’s look at someone who bought $5,000 worth of BTC this year. After turning that into $10,000 through trading, they later lost cash due to a dip in the markets and took a big hit, losing $8,000. They cashed out, walking away with just $2,000. They would then be able to harvest a loss of $3,000 for the year which would be deducted from their taxable income. If that person made $50,000 in regular income, only $47,000 of it would be taxable.

In order to write off cryptocurrency losses as tax deductible in the U.S., it’s essential to properly file, with exact dates, all transactions incuding gains and losses. Certain online tools, such as bitcoin.tax, can be useful in calculating capital gains and losses. While 2018 has been a bad year for cryptocurrency investors, the ability to write off thousands of dollars of bad trades should provide some consolation.