Let’s just say that 2022 has not been the best year for cryptocurrency.
bitcointhe most well-known cryptocurrency, took a beating last year, dropping more than 60%, with many more alternative currencies provide similar losses. Although the time window for documenting cryptocurrency losses for the 2022 tax year has now expired, knowing some cryptocurrency tax tricks can help you save money if you plan to continue investing in digital currencies, stocks, or other securities in the coming years.
One technique, known as tax loss harvesting, allows you to claim capital losses incurred from cryptocurrency, investments, or property on your taxes, in order to offset taxes owed on future years’ gains. When properly documented, capital losses can offset any capital gains income you earned in the same year, plus up to $3,000 in taxable income for that year. If your total losses exceed $3,000, you can carry forward the remaining balance to future years’ tax returns. We love this because it can help lower your taxable income, and possibly your tax bill.
Harvesting the tax loss has caveats. You can only claim capital losses from the cryptocurrency once the loss has been “realised”, i.e. once you have sold your coins. The tax rate also varies, depending on whether or not you have held currency for more than a year. However, with the past year offering its fair share of industry scandalsMany investors who sustain significant losses may just want to sell their holdings and move on. If you do, know that you can “catch” your losses and save some money on taxes for years to come.
Here’s more about how tax loss harvesting works for cryptocurrency investors, along with what certified experts say you should keep in mind.
Read more: Best crypto tax software
How the IRS Classifies and Taxes Your Cryptocurrency
Ryan Lucy, a certified public accountant and executive vice president at the IRS, said the IRS interprets cryptocurrency as property rather than security. Piasec, an accounting firm. In the 2014 and subsequent notifications, the IRS explicitly stated no dealings [crypto] “As collateral, but as property,” Lucy said.
When you sell a property or asset for more than you paid, the difference is called a capital gain, and is subject to capital gains tax. This tax rate varies, depending on how long you’ve held the asset. If you hold the asset for a year or less, it will be a short-term gain, and it will be taxed like your income tax rate.
Less than $10,275
10%
$10,276 to $41,775
12%
$41,776 to $89,075
22%
$89,076 to $1,705,050
24%
$170,051 to $215,950
32%
$215,951 to $539,900
35%
Over $539,900
37%
Source: IRS
In contrast, if you hold your assets for more than a year, the IRS calls that gain long-term, and it will tax you at one of three rates for the 2022 tax year.
If your taxable income is $41,675 or less, your capital gains tax rate is 0%, if your taxable income is between $41,676 and $459,750, the rate is 15%, and if your taxable income is more than $459,750, The rate is 20%.
The IRS lists certain exceptions Which rates are higher, but none of them currently apply to cryptocurrencies.
Then there are capital losses. If you sell an asset for less than what you paid for it, it is considered a capital loss. A lot of people who have been holding bitcoins since early last year are likely to experience a huge capital loss right now. When you sell your cryptocurrency at a loss, it can be used to offset other capital gains in the current tax year, and possibly in future years as well. If your capital losses are greater than your gains, then up to $3,000 can be deducted from your taxable income ($1,500 if married, file separately). In addition, any unapplied losses can then be carried forward and applied to the next year’s tax return.
with me yet? When you realize a loss, it can give you a tax break. That’s tax loss harvesting in a nutshell, and some investors do it strategically to protect their future gains.
Can you sell the coins, claim the loss, and then buy them back?
Technically, yes. This is one advantage of the IRS classifying cryptocurrencies as property rather than as stock.
tax authority Washing the sale rule It states that if investors sell a security at a loss, and then purchase a “substantially identical” security within 30 days of the sale, they cannot claim those losses as capital losses on their taxes. Think of this as the IRS’ way of discouraging tons of transactions (and subsequent market volatility) from people trying to manipulate the tax loss harvesting process.
However, cryptocurrencies are not subject to the wash sale rule as of this writing. “If their definition is later expanded by Congress, that’s fine, but until then, encryption is not security,” Lucy said. Remember that you cannot claim a loss of principal until it is realized; If you are currently navigating a cryptocurrency downturn, selling your coins and then buying them back at a later time is technically limiting at the moment, and will allow you to realize the loss for tax purposes.
said Cristian Rivera, CPA and founder of the company E-commerce accountants, an accounting firm. “What some investors do is they use software tools like TaxBeat To keep track of your so-called basis in your investments. This is your realized gain or loss. If you have made gains, but you also have losses that have not yet been realized, [the software can] “Initiate those trades so you can profit from losses and avoid a huge tax situation,” Rivera said.
Consult a tax professional if you plan to implement a tax harvesting strategy on a regular basis.
How to claim cryptocurrency losses on your taxes
When you claim cryptocurrency losses, you will first need to document whether they are short-term or long-term losses Figure 8949. He said the type of loss would matter if you also had a capital gain in the same tax year Eric Brunikant, Certified Public Accountant and Head of Tax at Betterment, a financial advisory firm. “If your gains exceed your losses, the nature of your loss can have an impact on the net tax you pay,” Bruninkant said. In addition, the type of loss will be important if you plan to carry forward the loss to future tax years.
Form 8949 is then included in a file scheduled, which calculates the total net capital gain or loss. You will then attach Schedule D to your Form 1040. If you use a cryptocurrency exchange, be sure to check and see if they have distributed a form to you, such as 1099-MISC, so that you can match the numbers.
If you use tax software to file your taxes this year, know that you may need to pay for a higher level of service to report cryptocurrency activity.
Read more: Best tax software for 2023
Turn your crypto losses into a tax break
The cryptocurrency continues to endure regulatory scrutiny and a volatile market. Learn what matters when it comes to claiming capital losses and you’ll be better prepared to save money when filing taxes.
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