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Can I claim a tax deduction for my cryptocurrency losses? 

Have you experienced losses this year when trading cryptocurrencies? Trading cryptocurrencies can be a dangerous endeavor. Cryptocurrency traders frequently suffer financial losses over the course of one tax year due to the high volatility and unstable coin pricing. Fortunately, cryptocurrency investors can write off their losses when filing their taxes. 

These deductions may reduce or even eliminate an investor’s tax liability, resulting in a tax refund. With the use of deduction you can save a lot of dollars on your tax payment. So, here’s a detailed article with valuable information about claiming cryptocurrency capital losses on your tax return to offset your profits.

Can cryptocurrency losses be written off as a tax deduction?

When determining how much bitcoin is taxed, the IRS recognises cryptocurrencies as property and applies capital gains and loss limitations. Your capital gains and up to $3,000 in personal income will be offset by any losses you incur after trading, selling, or otherwise getting rid of your crypto asset. Check the following information to have better knowledge of how this operates. 

How could cryptocurrency losses be reported to offset increases in capital?

You can take into account your earnings to offset your cryptocurrency losses, which would reduce your income tax obligation. To profit from this tactic, shrewd bitcoin traders frequently sell assets at a loss on purpose. Keep the time you owned the asset in mind especially when calculating your capital gains and losses. There’s a catch though, you can only use – as per the IRS – long-term capital losses to offset long-term capital gains. For this reason short-term capital losses cannot be used to offset short-term capital profits.

You can use either long- or short-term capital losses against short-term capital profits after balancing losses of the same kind. 

You use a cryptocurrency tax tool to keep track of your capital losses.  

Many cryptocurrency investors utilize crypto tax software to automate the reporting procedure rather than manually recording each bitcoin trade on a spreadsheet. The best software links your cryptocurrency exchanges and merges all of your prior trades to make crypto tax reports with a single click. Once you have a clear report you can use it to check your losses and use it to file your taxes correctly. You can even combine reports directly into your tax account for quick filing. One such tax tool is FlyFin, which also includes a federal income tax calculator, a 1099 tax calculator, and a crypto tax calculator to assist you in determining your tax liability. 

What are both long- and short-term capital gains?

Your transaction will be viewed as short-term capital gains if you hold a particular cryptocurrency asset for less than a year. The IRS taxes your other income along with your short-term capital gains. 

Let’s address the elephant in the room – “What’s the tax on my cryptocurrency?”. Keeping a  cryptocurrency in your portfolio for more than a year is considered a long-term capital gains asset and you’ll be taxed accordingly by the IRS. Cryptocurrency assets are subject to tax rates of 0%, 15%, or 20%. But it also depends on your filing status and taxable income. 

The future route

Finally, your tax requirements may get more difficult as your cryptocurrency portfolio becomes more sophisticated. In order to help you deduct cryptocurrency losses on your tax return, follow the preceding recommendations. Using FlyFin, you can also learn about different forms like the 1040 ES, Schedule C, and 1099-K in order to comprehend tax rules.


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