Cryptocurrency tax strategies to increase your tax savings

January 10, 2019
Darya Karatkevich

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 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. Additionally, there are other special tools available, for example, CoinTracking, which compiles an overview of your previous trades, so that they may be used during tax season.

Capital gain vs. 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 is what income tax bracket you fall into, and two is how long you held the asset. A capital loss is exactly the opposite. It is basically when an investor sells an asset for less than he/she 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. The 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 according to the tax laws of some countries (U.S. included), 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 costs a significant amount of money in electricity, at times even costing more than a cryptocurrency is worth itself, especially considering the bear market. These costs, as well as the cost of the systems used to mine, can be written off. A write-off is an expense of doing business that can be deducted from taxable income.

So, if your 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 following 2018’s crypto winter. Cryptocurrency taxes can be confusing, especially for new investors. Some have even resorted to tax evasion in order to skip the whole ordeal. However, beware: the IRS is cracking down on tax evasion in the cryptocurrency industry.

You can read the detailed information on crypto-related taxation in the U.S., along with the answers to all FAQs the IRS provides, here. 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 and look forward to a profitable 2019.

Post written by Darya Karatkevich
Darya is a blockchain market observer with 5+ years of experience as an author and editor for major tech blogging platforms. Her fortes are blockchain technologies and solutions, cryptocurrencies and crypto-related regulations.

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