Capital Losses can be carried over indefinitely
Cryptocurrency is a new asset class, where you can own a store of value (e.g., bitcoin), a tokenized security or asset (e.g., real estate holdings, fractionalized painting), or a token providing access or utility to a network (e.g., utility tokens). Since stricter compliance and regulations, especially taxation law, have been imposed on the crypto market, the terms ‘capital gains’ and ‘capital losses’ have become more and more popular to investors in this market. Let’s go over this quickly…
A capital gain is the profit resulting from selling the cryptocurrency at a price that is higher than the purchase price. Meanwhile, capital loss is the loss when you sell your cryptocurrency at a lower price than the purchase price. Simple enough, right? Well, not exactly for cryptocurrencies. As cryptocurrencies are treated as property for tax purposes, like stocks, bonds or real estate holdings, it is subject to capital gain and capital loss taxes. A big difference, however, is that wash sales do not apply to cryptocurrency, which may sound complex for some cryptocurrency enthusiasts. Rest assured, it just doesn’t apply.
Before you go on to say, “well, that’s not very fair,” let’s touch on a very noticeable silver lining to the 2018 Bear Market and crypto-losses.
If you have been the victim to crypto-tax losses, witnessing more losses than gains this year, we’ve got some good news for you as you begin to file your taxes. According to IRS forms Schedule D of capital losses and gains as well as tax loss carry-forwards, there are some ways crypto investors can use their capital losses as following:
First and foremost, capital losses can be used to offset capital gains
Imagine this! Your 2017 was incredible, followed by a series of financial mishaps and substantial losses in 2018. Everything has been wiped out and then some.
Silver Lining: Any capital loss incurred in a tax year can be used to offset any capital gain during the same tax year. For example, if you have 10,000 USD of capital loss and 10,000 USD of capital gain in 2018, these will offset each other. In cases where investors have both profits and losses from their activities, offsetting the capital gain is the prioritized function of the capital loss before considering other situations. Capital losses from cryptocurrency investments may be used to offset other capital gains (e.g., stocks, property sales, etc.)
A maximum of 3,000 USD capital losses can be used to deduct ordinary income
We’ve ascertained that you can make those losses work for you, but there is one drawback. If you have no profit from the investment, only a maximum of 3,000 USD from your capital loss is eligible to offset your ordinary income in any single tax year.
Example: With 10,000 USD of capital loss, no capital gain and 30,000 USD of ordinary income, 3,000 USD of capital loss will be considered a deduction of your ordinary income. You only need to pay tax on 27,000 USD of ordinary income. The rest 7,000 USD of capital loss can be carried forward to the future tax years.
Capital losses can be carried over indefinitely
Assuming that this year you have a 20,000 USD loss and no capital gain, you would take 3,000 USD from the capital loss for the ordinary income deduction. The following year, the net capital loss remaining will first be used to offset any capital gain for that year, for example 7,000 USD. Of the remaining 10,000 USD, a 3,000 USD loss can be deducted from the ordinary income of this second year. This practice can be done year-over-year until the net capital loss is reduced to 0.
The concept of realizing a capital loss on purpose is called ‘tax loss harvesting’ which can help savvy investors lower their tax bill in a down market. BitTaxer CPA Advisor Shehan Chandrasekera touched on this in a recent article.
If you hold your cryptocurrency for more than one year then sell it, the capital gain/loss is treated as a long-term capital gain/loss. Cryptocurrency that is held less than one year before disposal when sold would be treated as a short-term capital gain/loss.
Short-term capital gains are netted with short-term capital losses and long-term capital gains are netted with long-term capital losses.
It is always advisable to find a qualified tax adviser or CPA to support you in crypto taxation. If you’re looking for a qualified CPA, with experience and interest in cryptocurrency taxation, don’t hesitate to reach out to BitTaxer through Telegram or our website.
At BitTaxer, we hope to provide a holistic and comprehensive tax solution for users to account for any type of virtual currency transaction, giving special attention the utility of Virtual Currency as both a capital asset, as well as a method of exchange. BitTaxer is the fastest, easiest, and most accurate way to calculate and file income, deductions, gains and losses from your virtual currency trades. CPA-Approved and works across every device.