Here’s How to File Cryptocurrency Loss Deductions at Tax Time

The state of cryptocurrency markets may look bleak, but fortunately there’s a silver lining. Any cryptocurrency losses you took in 2018 can be written off as capital losses. Filing a capital loss can help you move into a lower tax bracket. The savings that can result can be quite large. Read on to find out more details.

Filing a capital loss isn’t as complicated as you may think

The IRS categorizes each cryptocurrency transaction you make in one of two ways. If you sell your crypto asset for more than you paid for it, that’s considered a capital gain. Likewise, if the price of your asset declines and you sell, the transaction falls into the capital loss category.

The New York Times reported on how cryptocurrency losses are considered capital losses for tax purposes last July:

“As on the stock market, losses can be used to offset capital gains, subject to certain rules, and losses that are not used to offset gains can be deducted—up to $3,000—from other kinds of income. Unused losses can be carried over to future years.”

How to determine how much you will save

In order to find out if filing a capital loss will benefit you, the first thing you need to do is determine which tax bracket you’re currently in. There are seven tax brackets in all. Each bracket has a different tax rate.

If you’re single, you’ll pay just 10% if your taxable income amounted to $9,525 or less. If you made between $9,526 and $38,700, you’ll pay a flat rate of $952.50 plus 12% of whatever you made over $9,525. The next bracket requires you to pay $4,453.50 plus 22% after you hit $38,700.

If you’re married and intend to file jointly, you can benefit even more if you qualify for a lower tax bracket.

Deduction rules and limits

The IRS lets you deduct up to $3,000 worth of crypto losses each year from ordinary job income. Losses that go beyond $3,000 can be carried forward into the next year.

For example, if you’re single and you earned $40,000 at your day job, you can use your $3,000 cryptocurrency loss to drop down from the $38,701-$82,500 tax bracket to the $9,526-$38,700 tax bracket. If your loss was $6,000, you can do the same thing again next year.

If you benefited from selling your home or trading stocks in 2018, there is no limit to the amount you can deduct from those revenues.

Doing the math

In order to determine how much you gained or lost in cryptocurrency markets, you have to find out the price of the cryptocurrency at the time you bought it. Then, you have to find out the value of the asset when you sold it. The difference between those two numbers will determine how much you gained or lost on the transaction.

Cryptocurrency tax software

In the past, cryptocurrency traders used spreadsheets to keep track of all their transactions. But now, there are various software solutions that automate all the recordkeeping. These tools can import your data from cryptocurrency wallets, exchange accounts and mining pools.

The cryptocurrency tax tool depicted below is called CoinTracking.info. It can import data from all the popular exchanges and generate IRS form 8949 (Sales and other Dispositions of Capital Assets). This is the form you need to include with your tax return if you want to claim a capital loss. In addition, CoinTracking.info integrates with TaxAct, TurboTax and other popular tax software.

Final thoughts

Last year was a bad one for cryptocurrency markets. However, deductions can help you recoup some– or maybe even all– of your losses. Now that there are several inexpensive software solutions that will do the accounting for you, crunching the numbers is easier than ever before.