Paying income taxes is certainly one of the least enjoyable duties known to mankind. And claiming your Bitcoin losses is also sure to rank as your least memorable task of late 2018. However, the Internal Revenue Service (IRS) is not an authority figure to be ignored nor openly defied. Accurate, transparent reporting of your Bitcoin and cryptocurrency gains and losses will keep you off of Big Bro’s list of ne’er do wells.
The Long and Short of It
Here’s a very basic overview of Federal income taxes as applied to your Bitcoin losses. Keep accurate records of your Bitcoin trades and tax time will be that much simpler and stress-free. Many firms now offer specialized tax accounting software. These digital marvels will help automate the entire crypto tax prep process for you at year-end.
A Short-Term Capital Loss Example
- You bought $10,000 of BTCUSD on December 1, 2017
- BTCUSD price per unit: $10,000
- BTCUSD units acquired: 1.00
- Transaction fees: $150
Cost basis: $10,150
- You sold 1.00 units BTCUSD on February 5, 2018
- BTCUSD price per unit: $7,500
- Transaction fees: $112.50
Net proceeds: $7,387.50
Subtracting your net proceeds of $7,387.50 from your cost basis of $10,150 results in a short-term capital loss of ($2,762.50) for you.
Because you held your BTCUSD for less than one year, your loss is considered a short-term capital loss. The IRS permits you to offset short-term capital gains against your short-term capital losses, up to a maximum of $3,000 per year (if you’re married and filing separately, the annual limit is $1,500). If you have no short-term gains and only short-term losses, you can still deduct them on your Federal 1040 form.
A Long-Term Capital Loss Example
- You bought $12,000 of BTCUSD on October 29, 2017
- BTCUSD price per unit: $6,000
- BTCUSD units acquired: 2.00
- Transaction fees: $180
Cost basis: $12,180
- You sold 2.00 units BTCUSD on November 20, 2018
- BTCUSD price per unit: $4,500
- Transaction fees: $135
Net proceeds: $8,865
Subtracting your net proceeds of $8,865 from your cost basis of $12,180 results in a long-term capital loss of $3,315 for you. Note that you always include your trade transaction costs. Add them to your cost basis and subtract them from your net proceeds.
Because you held your BTCUSD for more than one year, your loss is considered a long-term capital loss. The IRS permits you to offset long-term capital gains against your long-term capital losses, up to a maximum of $3,000 per year (if you’re married and filing separately, the annual limit is $1,500). If you have no long-term gains and only long-term losses, you can still deduct them on your Federal 1040 form.
The Form Factor
Unless you’re trading bitcoin for a living via a C-Corp., S-Corp., LLC, or other business structure, you’ll only need a few forms to fill out at tax time. If you trade Bitcoin part-time (non-professionally) and also run a business, there are also quarterly estimated tax payments to make. Here’s a look at what you’ll need to prepare your taxes properly:
- Your broker or exchange’s Form 1099-B or Form 1099K. Typically available after January 31st.
- Your monthly account statements. Use these to verify the accuracy of your Form 1099-B. You should also save every trade confirmation notice and make sure it agrees with your monthly account statement.
- You’ll need Form 8949 (Sales and Other Dispositions of Capital Assets) to list every Bitcoin trade made during the tax year. Use one Form 8949 to list your short-term capital gains and losses. Use another to list your long-term capital gains and losses.
- You’ll also need Schedule D (Capital Gains and Losses) to import information from your Form(s) 8949. This form will segregate your short- and long-term capital gains and losses. It will also determine if you are allowed to deduct your capital losses against your ordinary income (on Form 1040).
- If you are self-employed and also anticipate significant Bitcoin trading gains or losses for the tax year, be sure include those estimated gains or losses on your Form 1040 ES. When you send the IRS your quarterly (January, April, June, September) estimated tax payment vouchers, the figures you entered in your Form 1040 ES will help you avoid significant under- or over-payment of your Federal tax liability.
- Even if you’re NOT self-employed, you may still need to use the same Form 1040 ES calculations if you expect big gains or losses in your Bitcoin trading. It’s always best to make accurate quarterly tax payments. Waiting until April 15th to calculate your annual Federal tax bill can cost you big in fines and penalties. Especially if you’ll owe the IRS a significant amount of taxes.
Claiming Your Bitcoin Losses
Trading and investment losses are a reality that every Bitcoin market participant must come to terms with. At the end of the tax year, your account statements and Form 1099-B (or Form 1099-K) will paint a stark, honest assessment of your crypto trading talents. Or the lack of them! Use this annual wake-up call to refine your trading and investment strategies.
You should also use it to help set realistic financial goals for the coming tax year. For example, perhaps your short-term Bitcoin trades (swing trading) results are better than your long-term results. If so, maybe it’s best to trade via a mechanical short-term system, rather than speculate for the long haul. Or maybe even vice-versa, if your short-term trade results are a disaster but your long-term trades consistently deliver the goods.
Of course, the good news is that all of your Bitcoin losses, no matter how large, can be used to offset your Bitcoin gains. Say that 2019 turns out to be a great year of Bitcoin gains for you. You make $20,000 in short-term Bitcoin capital gains, trading several times throughout the year. If you had $5,000 in short-term Bitcoin losses in 2018, you can carry $3,000 of those losses forward into 2019. Thus, you reduce your 2019 taxable short-term gains from $20,000 to $17,000. And, if you do well in 2020 and make $10,000 in short-term Bitcoin gains, you can take the remaining $2,000 in short-term 2018 losses and reduce your 2020 short-term taxable gains to $8,000. Bada bing.
There really is a silver lining in every cloud.