It’s no secret that crypto markets have been volatile in recent months and years, with prices rising and falling like the stock market used to (but hopefully not for much longer). This can be stressful to traders and investors alike, who sometimes see big gains disappear overnight – or even in the middle of the day. There’s one question many people have been asking, though: do I have to pay taxes on my cryptocurrency losses? Here’s what you need to know!
What is Cryptocurrency
Cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. Examples include bitcoin, litecoin, ripple, and ethereum. Litecoin differs from bitcoin and other cryptocurrencies in various ways and was designed to improve upon bitcoin's shortcomings, taking advantage of some aspects in bitcoin's source code and going beyond others. Dogecoin was created by programmer Billy Markus from Portland, Oregon, who hoped to create a fun cryptocurrency that could reach a broader demographic than bitcoin.
How does taxation work with cryptocurrency
With cryptocurrencies, there is a complicated set of laws surrounding how they are taxed. First, when you trade one type of cryptocurrency for another, that’s considered trading one property for another and taxed as a capital gain (or loss). But when you make money off of an investment and you choose to liquidate it in exchange for fiat currency (USD), then that amount is taxable as ordinary income. Unfortunately, nobody really knows how cryptocurrencies will be treated moving forward—which makes planning your tax payments difficult. That said, experts seem to agree that no matter what happens with regards to treatment from here on out, paying your fair share will be crucial.
Tax Deductions for Cryptocurrency Losses
If you lost money trading cryptocurrencies in 2017, it’s a good idea to see if your loss is deductible. Cryptocurrency investors: The IRS says that like property such as stocks and bonds, virtual currency must be reported on a tax return as either short-term or long-term capital gains or losses. This means that if you bought $100 worth of bitcoin and sold it for $95, that counts as a short-term capital loss. If you owned the coins for more than a year before selling them at $85 each, that counts as a long-term capital loss. Keep track of your purchases and sales; there are multiple sites out there where individuals do nothing but record cryptocurrency prices so you can reference them later when tax time comes around.
Other issues with Cryptocurrency Taxes
Cryptocurrency prices are moving so quickly that it can be tough to take full advantage of tax deductions. Even if you manage to accurately track your crypto holdings, your accountant still might not think that your expenses are tax deductible. For example, if you use a hot wallet for some coins and a cold wallet for others, it's unclear whether or not you should deduct your maintenance costs. If you own several different cryptocurrencies, figuring out which ones fall into what category could be tricky—which means you may spend hours getting IRS-ready that ultimately lead nowhere. It’s almost easier just to forget about deducting anything at all!