Are Bitcoin Losses Deductible
Most crypto investors and traders are trying to recover from the red. The recovery experienced since the start of 2020 was brought to a screeching halt on March 12 as Bitcoin lost almost 40% within 48 hours. The general cryptocurrency capitalization wiped out over $50 billion within 24 hours. Due to the latest crumble, this tax season presents a major challenge for the Bitcoin community. If anyone sold their cryptos at a loss, there might be a silver lining in this cloud since bitcoin losses are tax-deductible.
Whenever the income tax season closes down, everyone gears up for filing returns and paying taxes. The past two years have been bruising for bitcoin, with the crypto falling significantly. But, one can claim bitcoin losses on tax under various circumstances. American investors lost $1.7 billion through the sale of bitcoin in 2018, as reported by CreditKarma.
But, just about 50% of them reported these losses to the taxman. Most people may not realize that they could save some money by deducting their bitcoin losses. Moreover, failing to report the losses may result in an audit resulting in penalties and interest payments.
Is it mandatory to report Bitcoin on taxes?
Bitcoin, just like any other asset, is subject to tax. Not many people are aware of this, as proven by the occurrence that only about 800 taxpayers annually stated their bitcoin profits between 2013 and 2015. Hence, it is essential to report bitcoin gains and losses on tax returns.
How is Bitcoin taxed?
The Internal Revenue Service (IRS) imposes taxes on bitcoin and other virtual currencies just like it does on property. Therefore, investors pay tax on losses and gains like they would for stocks, real estate, or bonds. It is complicated since bitcoin is a form of currency and not property.
Tax applies if one realizes a gain or a loss from selling, trading, or spending bitcoin. For instance, if you buy bitcoin at $300 and sell it at $700, you owe tax on the $400 gain. But, for the HOLDERS, they do not pay any tax until they sell their Bitcoin possession.
Interestingly, the system stipulates that you owe tax if you spend any bitcoin. Therefore, even when you buy a coffee with bitcoin, you must record that transaction and determine whether there was a loss or gain.
How much tax does bitcoin attract? It depends on your tax bracket and how long you have held your bitcoin. The crypto depends on short-term and long-term capital gains. The short-term gains tax falls within the ordinary income category on your specific income bracket provided that at the time of selling, you have held bitcoin for less than a year.
In the case that you have held the bitcoins for more than a year, the long-term capital gains taxes apply. It is a considerably lower tax rate, although it still depends on your income
bracket. Though these developments were not expected, it is necessary to notice that taxes are imminent, irrespective of the asset classes or the nature of dealings.