Aside from the risks associated with crypto trading, did you know there are also tax benefits? Learning about the Sublimit, Reporting, and Claiming procedures could help maximize your tax benefits.
Once you’ve decided to invest in crypto, it’s time to learn how to minimize your tax liability. Listed below are some tips that can help you reduce your losses.
Tax benefits
Reported crypto losses are a great way to offset your Capital Gains Tax bill. The tax benefits come in two forms: a short-term capital gain and a long-term capital loss. In this case, the long-term loss applies only to profits made on cryptocurrency sales. If you are planning to sell your crypto assets in the near future, you can use your short-term loss to offset your long-term gains. However, you have to consider the wash sale rule.
When it comes to reporting crypto losses, it is important not to be too creative. Most taxpayers will be subject to the standard federal realized gain and loss rules, which cap losses at $3,000 per year.
However, this does not mean that you should abandon your investment and try to sell your crypto assets before they are worth their cost. As long as you wait at least 30 days before buying back the same coin, you should be able to realize the tax benefits of crypto losses.
Sublimit
If you’re worried about cryptocurrency value, you’re not alone. Cryptocurrency is becoming recognized as property and is increasingly protected by insurance. However, currency losses are typically subject to sublimits.
That’s why it’s important to review your property and special insurance policy for cryptocurrency-related coverage. Many property policies only cover loss of personal property, which may not be enough. But there’s a way to protect yourself against crypto losses by taking advantage of the benefits of these policies.
In a recent case, a judge ruled in favor of cryptocurrency coverage. In Kimmelman v. Wayne Insurance Group, a plaintiff sued an insurance company after losing $16,000 in Bitcoin. The court found that the insurance company was liable for the loss but only provided coverage for $200 under the sublimit. In that case, the insurer violated the terms of the contract and acted in bad faith. The insurer ultimately decided to award Kimmelman just $200 under the policy.
Reporting
If you’re a crypto trader, the first step is to file your cryptocurrency tax return. In the United States, you must report your losses by filling out Form 8949. You can also manually enter your crypto losses by using online calculators. For the UK, you must use Form 8471.
The US has different rules for crypto investors. The rules vary by state, but for most states, you must report your losses on your income tax return.
As long as you keep accurate records, you can avoid penalties of up to 40%. However, you must be aware of the risks of submitting inaccurate tax returns. The IRS places the burden of proof on you to provide proper documentation and records of your trades. Make sure your records are in order, as it’s crucial to prove your losses.
What about losses due to scams?
If you’ve recently suffered a loss due to a crypto scam, you might be wondering whether you can claim losses from your lost cryptocurrency.
Most crypto scam victims do not retain ownership of the crypto, and so the IRS deems such losses “abandonment losses” and allows you to write off these losses.
While some investors claim their losses on IRS Form 4686, you should be sure to seek tax counsel before you try to claim a loss. The IRS recently sent Letter 6174 to 10,000 taxpayers, stating that this option only applies to losses acquired through abandonment, not investment.
Final thoughts
As of right now, you can only claim the loss in three of five tax years. For any other year, you must report the sale of crypto. You should also report any cryptocurrency sales to the IRS (for US taxpayers), as they are considered property. If you’ve incurred losses from a crypto mining operation, such as Bitcoin mining, you can use these losses to offset capital losses, and you can carry them back as far as April 2017.
This article is presented for educational purposes only and is not an inducement or recommendation for any specific course of action related to investing in cryptocurrency or in managing your taxes. Do your own research and speak with an accounting or tax professional before making any decisions.
I write about blockchain, crypto, NFTs and other disruptive technologies and innovations.
