It is estimated that nearly $400 billion dollars were lost due to the 2018 cryptocurrency market plunge. The significant rise of cryptocurrency value in 2017 brought many new traders into the market, only for their dreams to be crushed the following year. With that being said, many of us are glad to see 2018 go and 2019 arrive. Yet, there is still some hope of making up for 2018 losses. Tax season is upon us, and if you were one of the many who lost money in the 2018 bear market, there are a few tax strategies to make up for a portion of what you lost.
Get your Affairs in Order
Tax season can be a horrific time for unorganized cryptocurrency investors. Even more so for investors who have traded heavily throughout the year. It is vital to keep records of every transaction and trade conducted as both profits and losses can have an effect on cryptocurrency taxes. Luckily for the ill-prepared, tools such as TurboTax allow traders to import data from wallets and exchange accounts. There are also tools available such as, CoinTracking, which compiles an overview of your previous trades, so that they may be used during tax season.
Capital Gain V.S. Capital Loss
Most governments around the world view cryptocurrencies as assets. In terms of taxation, this means they either fall into a capital gain or a capital loss. Capital gain is when an investor sells his/her cryptos for more than they purchased them for. These gains can be taxed upon two factors, one, what income tax bracket you fall into, and two, how long you held the asset for. A capital loss is exactly the opposite, it is basically when an investor sells an asset for less than they paid for it, which was most likely the case for many in 2018. So what does this all mean?
Entering a Lower Tax Bracket
One of the best ways of recouping your losses would be through entering a lower tax bracket. 2018 – 2019 brackets can be viewed here. Entering a lower tax bracket can best be achieved by deducting your losses. It may have some negative connotations, but claiming a loss can be used to offset income gained from other sources. It also has the ability to place you in a lower tax bracket, resulting in thousands worth of tax savings. For example, if someone is making around $40,000 per year, the deduction of a net capital loss up to $3,000 (the limit allowed by the IRS) can place you in a lower tax bracket, allowing for a lower tax rate. A lower tax rate means fewer deductions to profits, but what about those who have gained their cryptocurrencies in other ways?
Taxes for Cryptocurrency Miners
One of the greatest tax strategies miners can use to improve their tax report is by disclosing expenses. Mining cost a significant amount of money in electricity, at times even costing more than a cryptocurrency is worth itself. These costs, as well as the cost of the systems used to mine, can be written off. A write-off is basically an expense of doing business that can be deducted from taxable income. So, if you’re income from cryptocurrencies is from mining rather than trading, write-offs are a great way to make up for what you spent on electricity and computing power throughout the year.
Ensuring a Positive 2019
Tax season can be a stressful time for anyone, especially after a year like 2018. Cryptocurrency taxes can be confusing, especially for new investors. Some have even resorted to tax evasion in order to skip the whole ordeal. However, this may have been possible in the early days of cryptocurrencies, but not any longer as the IRS is cracking down on tax evasion in the cryptocurrency economy. It is pretty simple, keep records of all transactions and trades so that when tax season arrives it simplifies the process. Use the tax strategies mentioned above to recoup some of your losses, and let us all put 2018 behind us and look forward to a profitable 2019.