How to write off bitcoin losses on your tax returns?
Have you incurred losses with your bitcoin transactions? The IRS has made it mandatory to track all bitcoin transactions irrespective of value. Therefore all individual taxpayers are required to keep track of buying/selling of bitcoins even if it relates to purchasing goods or services ( bartering).
In this article, we will outline the key points that you may find it useful before trading any bitcoins. Due to the complexities that may arise relating to the tax computation we highly recommend that you contact a tax professional for complex scenarios
Important key points for taxation purposes
- Bitcoins are considered as property.
- Bitcoins will incur capital gains tax.
- Short-term capital gain/loss transactions: If you have held the bitcoins for less than a year, any profit or losses are considered short-term. They are taxed according to the ordinary income tax rates i.e they are added to your regular income.
- Long-term capital gain/loss transactions. If the bitcoins were held for more than a year, they are taxed according to the Long-term capital gains tax rates. They are calculated as follows :
- 0%- if you are in the 10-15% ordinary income tax bracket.
- 15% – if you are in the 25-35% ordinary income tax bracket.
- 20%- if you are in the 39.6% tax bracket
How to write off losses
- Short-term capital losses: If you held the bitcoins for less than a year and sold it at a loss.
- The short-term capital losses are first offset against short-term capital gains.
- Then, any additional loss can be taken up to a maximum of $3,000 in a year or the actual loss incurred whichever is lower. There is no limitation on carrying forward of losses i.e you can deduct up to $3,000 every year till the losses are offset by income.
- Offset against long-term capital gains: If there is a surplus loss in addition to offsetting against short-term capital loss, then they can be deducted against the long-term capital gains.
General IRS capital gains rule: Any short-term losses are first offset against short-term gains. Similarly, long-term losses are offset against long-term gains. Any excess losses generated in this sub-category can be offset against another eg: Net short-term losses can be offset against long-term capital gains. Similarly, net long-term capital losses can be offset against any short-term capital gains.