Everyone hopes to make big gains on their virtual currency investments. Truth is, like any regular security, there is always the chance of taking a loss. With the spectacular price run up cryptocurrency saw at the end of 2017, many investors jumped at the chance to put their money into Bitcoin, various coins, projects and ICOs. But not all of these have been fruitful. Here’s how you can turn those losses into a positive for your client.
To review, selling cryptocurrency is treated the same as selling any other capital asset like stocks, bonds, and real estate.That means every time a trade is made or profits locked in, they are recognized like any other capital gain or loss–meaning your client will owe tax on any money made. The good news is that if your client is a savvy investor, engaging in the “best practice” of diversifying their portfolio, they can use their crypto loss to offset gains in other areas, be it from other trades or even the sale of property. Cha-ching!
Did you know?: A taxpayer may use his total net loss to reduce income dollar for dollar, up to $3,000 (or $1,500 for those who are married and filing a separate return). If there is a total net loss which exceeds the yearly limit on capital deduction, you can carry over that excess amount into your client’s returns the next year, netting them even more money.
When investing in virtual currency, there is always the risk of loss, be it through hacking, exchange issues, fraudulent ICOs, or just general absentmindedness. However, it’s important to note that, for tax years post-December 31, 2017, theft losses are not deductible–the only exception to this is if the loss is attributable to a federally declared disaster.
In order to report your client’s capital assets, each trade needs to be accounted for on the IRS form 8949. This can get particularly tricky for high-volume traders, as you need to list the name of the crypto, date, price traded, cost basis for the trade, and whether a loss or gain occurred. Luckily, there are ways to save yourself time and effort so you can spend more time developing your business, and less trying to figure out how to make sense of (potentially) thousands of transactions.
With BitTaxer, you upload your client’s transactions directly from their virtual currency exchange of choice, answer a few questions, and the software gives you a completed report to use for filing, which can also be imported into your chose tax software. Pretty awesome stuff.
Sadly, in the current crypto-landscape we are currently in, there are plenty of losses to go around. However, with a little foresight and a some knowledge in your back pocket, you can at least make sure your client is getting the maximum amount of savings allowed by law.