How to Pay Cryptocurrency Taxes in a Bear Market
While the cryptocurrency markets recently picked up, downward pressure can still be felt, with losses being experienced by many. Filing taxes adds to the heat of the markets. Many investors in cryptocurrencies will have to claim capital losses to reduce their tax bill.
Capital Gains and Losses
The IRS advises that when a person sells an asset, it results in a capital gain or loss. In order to determine the capital gain or loss of an asset, they have to find the difference between what has been paid for the property and what has been received for it.
Taxpayers with capital losses that are larger than their capital gains can deduct the difference on their tax returns, presenting them as losses. If the limit of $3,000 ($1,500 if married) per year is exceeded, the deductions can be carried to the next year.
Cryptocurrency holders can maximise their capital loss by offsetting capital gains in other asset classes in the same tax year, using losses to offset up to $3,000 of other income (or $1,500 if married) , and moving capital losses to incoming years.
As an example, $5,000 of losses in the stock market an $9,000 of losses in cryptocurrencies could be used to gain savings of $1,920 in tax as well as $1,000 of capital losses that could be rolled over to the next year.
Keeping Records of Transactions
Having solid records of cryptocurrency transactions is required to support claims made for cryptocurrency losses. Cryptocurrency trades may be subject to calculations for capital gains even before they are converted to fiat. IRS guidance makes it clear that virtual currencies can be taxed as property regardless of the cryptocurrency held. Software can be used to keep track of individual transactions , making it easier to report losses and gains. There are tools which help to automate tracking and record-keeping processes.
Similarly, miners may be able to take advantage of capital gains provisions but will have to make it clear whether they are a hobbyist or business miner. This will affect how they are able to file their losses and gains. Unfortunately, miners may not be able to gain as many deductions. However, a hobbyist will not have to pay self-employment taxes.
It is important to keep in mind that many cryptocurrency exchanges cannot provide their users with accurate tax documentation. The fact that cryptocurrencies are sent to different wallets on different exchanges means that it is almost impossible to know how , where and what cost cryptocurrencies are acquired. Cryptocurrency tax aggregating tools help to increase the accuracy of calculations. With such tools, risks of errors in calculating cost basis can be reduced.
Consulting With a Professional
Failure to report losses and gains can result in regrettable consequences in the future. While the IRS is still trying to get to grips with the nature of cryptocurrencies and appropriate tax measures to implement, the public nature of blockchain means that with time, gains and losses will easily be traceable. Readers are advised to seek consultation of a qualified CPA. A qualified CPA can provide professional advice necessary to reduce taxes and also meet tax obligations.