Around this time last year, Bitcoin prices were hovering around $20,000. However, much has changed since then. A confusing fork that spawned two new Bitcoin spin-offs and accusations that the price of Bitcoin may have been manipulated last year were two of the contributing factors that led to massive price drops.
The good news: if you bought Bitcoin or other cryptocurrencies during last year’s bull market, you may be able to recoup some or even all of your losses this year if you sell now. Cryptocurrency losses count as capital losses. These losses can help you enter a lower tax bracket. Read on to find out how it’s done.
Cryptocurrency Tax Deductions, Explained
The United States and most other governments around the world classify cryptocurrencies as assets. When you sell an asset, the transaction can be categorized in one of two ways.
- Capital gain. When you sell a cryptocurrency for more than you paid for it, this is considered a capital gain. Your profits count as taxable income.
- Capital loss. When you sell a cryptocurrency for less than you paid for it, you’ve incurred a capital loss. Capital losses can reduce your net income for the year.
If you decide to hold onto your cryptocurrency, you won’t be able to deduct your losses. You have to sell and take the loss if you want to enter a lower tax bracket.
Tax Brackets in a Nutshell
The first step toward how much money you may be able to save by deducting your cryptocurrency losses is understanding which tax bracket you’re currently in. If you’re close enough to the edge of the bracket, you may be able to move down.
The IRS provides different tax brackets to single and married individuals.