This story is a part of Taxes 2023, CNET’s protection of the perfect tax software program, tax suggestions and every part else you’ll want to file your return and monitor your refund.
Let’s simply say 2022 wasn’t the perfect yr for cryptocurrency.
Bitcoin, the perfect recognized cryptocurrency, took a beating final yr, plummeting over 60%, with many altcoins delivering comparable losses. Though the time window to doc crypto losses for the 2022 tax yr has now ended, understanding a couple of crypto tax methods may help you lower your expenses if you happen to plan to proceed investing in digital cash, shares or different securities in coming years.
One method, often called tax loss harvesting, allows you to declare capital losses you had from cryptocurrency, investments or property in your taxes, so as to offset tax owed on future years’ beneficial properties. When appropriately documented, capital losses can offset any capital beneficial properties revenue you had in the identical yr, in addition to as much as $3,000 of taxable revenue for that yr. In case your complete losses exceed $3,000, you’ll be able to carry the remaining steadiness ahead to future years’ tax returns. We like this since it may assist decrease your taxable revenue, and probably your tax invoice.
Tax loss harvesting has its caveats. You may solely declare capital losses out of your crypto as soon as the loss is “realized,” which means as soon as you’ve got offered your cash. The tax fee additionally varies, relying on whether or not or not you’ve got held a coin for multiple yr. Nonetheless, with final yr delivering its fair proportion of business scandals, many traders who’re sitting on substantial losses may need to promote their holdings and transfer on. Should you accomplish that, know that you possibly can “harvest” your losses and avoid wasting cash on taxes for years to come back.
This is a bit extra about how tax loss harvesting works for crypto traders, together with what credentialed consultants say you must take into account.
Learn extra: Finest Crypto Tax Software program
How the IRS classifies and taxes your crypto
The IRS interprets cryptocurrency as property, not a safety, mentioned Ryan Losi, licensed public accountant and govt vice chairman at PIASCIK, an accounting agency. “In 2014 and subsequent notices, the IRS has particularly expressly mentioned to not deal with [crypto] as a safety, however somewhat as a property,” Losi mentioned.
Once you promote a property or asset for greater than you paid, the distinction is named a capital acquire, and is topic to capital beneficial properties tax. This tax fee varies, relying on how lengthy you held the asset. Should you held the asset for one yr or much less, it is a short-term acquire, and might be taxed the identical as your revenue tax fee.
Lower than $10,275
10%
$10,276 to $41,775
12%
$41,776 to $89,075
22%
$89,076 to $170,050
24%
$170,051 to $215,950
32%
$215,951 to $539,900
35%
Greater than $539,900
37%
Supply: IRS
In distinction, if you happen to held your belongings for greater than a yr, the IRS calls this capital acquire a long-term acquire, and can tax you at considered one of three charges for the 2022 tax yr.
In case your taxable revenue was $41,675 or much less, your capital beneficial properties tax fee is 0%.In case your taxable revenue was between $41,676 and $459,750, the speed is 15%.In case your taxable revenue was greater than $459,750, the speed is 20%.
The IRS lists sure exceptions during which charges are larger, however none of them presently apply to cryptocurrency.
Then there are capital losses. Should you promote an asset for lower than you paid for it, it is thought of a capital loss. Many individuals who’ve held bitcoin since early final yr are possible sitting on a considerable capital loss in the intervening time. Once you promote your crypto at a loss, it may be used to offset different capital beneficial properties within the present tax yr, and probably in future years, too. In case your capital losses are better than your beneficial properties, as much as $3,000 of them can then be deducted out of your taxable revenue ($1,500 if you happen to’re married, submitting individually). Moreover, any unapplied losses after that may carry over and be utilized to a future yr’s tax return.
With me to date? Once you notice a loss, it can provide you a tax break. That is tax loss harvesting in a nutshell, and a few traders do it strategically to safeguard their future beneficial properties.
Are you able to promote cash, declare the loss, then purchase them proper again?
Technically, sure. That is one benefit to the IRS classifying crypto as a property somewhat than a inventory.
The IRS’ wash sale rule states that, if traders promote a safety at a loss, then purchase a “considerably an identical” safety inside 30 days of the gross sales, they can not declare these losses as capital losses on their taxes. Consider this because the IRS’ manner of discouraging tons of transactions (and subsequent market volatility) from folks attempting to recreation the tax loss harvesting course of.
Cryptocurrencies, nonetheless, should not topic to the wash sale rule as of this writing. “If their definition later will get expanded by Congress, then OK, however till then, crypto is just not thought of a safety,” Losi mentioned. Bear in mind, you’ll be able to’t declare a capital loss till it is realized; if you happen to’re presently marinating within the crypto dip, promoting your cash after which repurchasing them at a later date is technically in-bounds for now, and would allow you to notice the loss for tax functions.
The method is efficacious sufficient that some cryptocurrency software program firms provide a method to automate tax loss harvesting, mentioned Christian Rivera, CPA and founding father of The Ecommerce Accountants, an accounting agency. “What some traders do is use software program instruments like TaxBit to trace what’s referred to as your foundation in your investments. These are your realized beneficial properties or losses. You probably have realized beneficial properties, but in addition have losses that aren’t realized but, [the software can] set off these trades so that you simply money out on losses and keep away from getting caught in an enormous taxable place,” Rivera mentioned.
Seek the advice of a tax skilled if you happen to plan to implement a tax loss harvesting technique regularly.
The way to declare crypto losses in your taxes
Once you declare crypto losses, you may must first doc whether or not they have been short-term or long-term losses on Kind 8949. The kind of loss will matter if you happen to even have capital beneficial properties in the identical tax yr, mentioned Eric Bronnenkant, CPA and head of tax at Betterment, a monetary advisory firm. “In case your beneficial properties exceed your losses, the character of your loss can have an effect on the web tax that you simply pay,” Bronnenkant mentioned. Moreover, the kind of loss will matter if you happen to plan to hold over the loss to future tax years.
Kind 8949 then will get included in your Schedule D, which calculates total internet capital acquire or loss. You will then connect Schedule D to your Kind 1040. Should you use a cryptocurrency alternate, you should definitely test and see in the event that they’ve distributed a kind to you, reminiscent of a 1099-MISC, in an effort to match numbers up.
Should you’re utilizing tax software program to file your taxes this yr, know that you could be must pay for a better tier of service so as to report cryptocurrency exercise.
Learn extra: Finest Tax Software program for 2023
Flip your crypto losses right into a tax break
Cryptocurrency continues to endure regulatory scrutiny and a unstable market. Know the ropes in the case of claiming capital losses and you will be higher ready to economize when submitting your taxes.