2018 Tax How To Reporting Losses In Cryptocurrency

Cryptocurrency Tax Loss Harvesting: A Guide for US Taxpayers

Introduction

As the cryptocurrency market continues to mature, tax authorities around the world are paying closer attention to how digital assets are being taxed. In the United States, the Internal Revenue Service (IRS) has issued guidance on how cryptocurrencies should be treated for tax purposes. One important aspect of this guidance is the ability for taxpayers to offset cryptocurrency losses against other income on their tax return.

What are Realized Losses?

Realized losses occur when you sell or trade a cryptocurrency for less than you paid for it. These losses can be used to offset gains from other cryptocurrency transactions, as well as other types of income, such as wages, salaries, and interest. For example, if you sell Bitcoin for a loss of $1,000, you can use that loss to offset $1,000 of income from your job.

How to Offset Crypto Losses

To offset crypto losses on your tax return, you need to follow these steps:

1. Calculate your crypto gains and losses. You can do this by tracking your transactions in a spreadsheet or using a cryptocurrency tax software.
2. Report your gains and losses on IRS Form 8949. This form is used to report sales and exchanges of capital assets, including cryptocurrencies.
3. Include your totals from Form 8949 on Schedule D of your tax return.

Example

Let's say you sold Bitcoin for a gain of $2,000 and Ethereum for a loss of $1,000. You would report the following on your tax return:

``` Form 8949: - Bitcoin: Gain of $2,000 - Ethereum: Loss of $1,000 Schedule D: - Net capital gain: $1,000 ```

Benefits of Crypto Loss Harvesting

There are several benefits to crypto loss harvesting, including:

* Reducing your tax liability: By offsetting crypto losses against other income, you can reduce your overall tax bill. * Improving your cash flow: If you have unrealized losses in your cryptocurrency portfolio, you can sell those assets to generate cash flow while still retaining your overall investment position. * Offsetting future gains: If you expect to have capital gains in the future, you can use crypto losses to offset those gains and reduce your tax liability.

Conclusion

Cryptocurrency tax loss harvesting is a valuable tool for US taxpayers. By following the steps outlined in this guide, you can offset crypto losses against other income and reduce your tax liability. If you have any questions about crypto tax loss harvesting, be sure to consult with a qualified tax professional.