Can you amortize crypto losses in taxes?

this story is part tax 2023the best tax software, tax tips, and all the other CNET coverage you need to file your return and track your refund.

Let’s just say 2022 wasn’t the best year for cryptocurrencies.

BitcoinThe timeframe for recording cryptocurrency losses for the 2022 tax year has ended, but we will continue to invest in digital coins, stocks, or other securities. If so, knowing a few cryptocurrency tax tricks can help you save money.

One technique, known as tax loss harvesting, allows capital losses from cryptocurrencies, investments, or assets to be taxed to offset taxes on future profits. If properly documented, capital losses can offset capital gains income earned in the same year against up to $3,000 of taxable income for that year. If the total loss exceeds $3,000, he can carry the remaining balance forward to the next year’s tax return. We like this because it reduces your taxable income and potentially lowers your tax liability.

There are caveats to tax loss harvesting. You can claim capital loss from your cryptocurrency only if the loss is “realized”, i.e. if you sell your coins. The tax rate also depends on whether he has held the coin for more than a year.Nonetheless, last year offered its fair share industry scandal, many investors with significant losses may want to sell their holdings and move on. Just know that you can then “harvest” your losses and save taxes for years to come.

Here’s a little more detail on how tax loss harvesting works for cryptocurrency investors, along with what qualified experts say should be kept in mind.

read more: best crypto tax software

How the IRS Classifies and Taxes Virtual Currencies

The IRS interprets cryptocurrencies as property, not securities, said Ryan Losi, CPA and executive vice president of accounting firm PIASCIK. “In notices since 2014, the IRS has made it particularly clear that [crypto] Not as security, but as property,” Losi said.

When you sell a property or asset for more than you paid for it, the difference is called a capital gain and is subject to capital gains tax. This tax rate depends on how long you have held the property. If the property is held by him within a year, it is a short-term gain and is taxed at the same rate as the income tax rate.

Source: IRS

In contrast, if you hold the property for more than one year, the IRS will refer to this capital gain as long-term gains and will tax it at one of three tax rates for the 2022 tax year.

• If your taxable income is $41,675 or less, the capital gains tax rate is 0%.
• If your taxable income is between $41,676 and $459,750, the tax rate is 15%.
• If your taxable income exceeds $459,750, the tax rate is 20%.

The IRS lists certain exceptions that result in higher rates, but currently do not apply to cryptocurrencies.

Then there is capital loss. If you sell an asset for less than you paid for it, it is considered a capital loss. Many people who have held bitcoin since the beginning of last year may be facing significant capital losses at this point. Selling cryptocurrencies at a loss can be used to offset other capital gains in the current tax year and future capital gains in the future. If the capital loss is greater than the gain, up to $3,000 will be deducted from taxable income ($1,500 for him if married, filed separately). In addition, any subsequent unapplied losses can be carried forward and applied to the following year’s tax return.

ever with me? If you recognize a loss, you can take tax relief. This is, simply put, harvesting tax losses, and some investors do this strategically to protect future profits.

Can I sell my coins, claim my loss, and buy them back quickly?

Technically yes. This is one of the benefits of the IRS classifying cryptocurrencies as assets instead of stocks.

Under the IRS wash sale rule, if an investor sells a loss-making security and purchases a “substantially identical” security within 30 days of the sale, those losses can be claimed as a capital loss for tax purposes. It is stipulated that you cannot Think of this as the IRS’s way of discouraging high volume trading (and subsequent market volatility) from those looking to exploit the tax loss harvesting process.

However, cryptocurrencies are not subject to the wash sale rules at the time of this writing. “If the definition is expanded later by Congress, that would be OK, but until then, cryptocurrencies are not considered securities,” Rosi said. Remember, you cannot claim a capital loss until you do. If you’re currently marinating in the plummeting cryptocurrency market, selling your coins and repurchasing them at a later date is technically within your reach at this point, and you can recognize a tax loss.

Christian Rivera, a CPA and founder of accounting firm The Ecommerce Accountants, said the technique was so valuable that some cryptocurrency software companies are offering a way to automate the collection of tax losses. said. “Some investors use software tools such as TaxBit to track what they call the basis of their investments. These are realized gains or losses. if there is a loss, [the software can] Trigger these trades to cash out your losses and avoid getting into huge taxable positions,” says Rivera.

If you plan to implement a tax loss harvesting strategy on a regular basis, consult a tax professional.

How to claim crypto losses for tax

When claiming a virtual currency loss, you must first document whether it is a short-term or long-term loss on Form 8949. The type of loss matters when there are also capital gains in the same tax year, says Eric Bronnekant. FinancialHe is a CPA and tax director for the advisory firm Betterment. “If gains outweigh losses, the nature of the losses can affect the net tax payable,” Bronnenkant said. Additionally, the type of loss is important if you plan to carry forward losses to future tax years.

Form 8949 is included in Schedule D to calculate overall net capital gains or losses. Then attach Schedule D to Form 1040. If you use a cryptocurrency exchange, check to see if they hand out forms such as 1099-MISC so you can match your numbers.

If you are using tax software to file your taxes this year, please know that you may be required to pay for a higher level of service to report your cryptocurrency activity. .

read more: Best tax software for 2023

Turn cryptocurrency losses into tax breaks

Cryptocurrencies continue to endure regulatory scrutiny and volatile markets. Knowing the tricks for claiming capital losses will prepare you to save money when filing your taxes.

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