Thousands of people around the globe are sat watching the crypto markets spiral deeper and deeper into the red, along with their crypto investments. For many, this is a worrying and scary time, but there is a silver lining – you just have to think outside the box. The losses you have incurred during this bear market can be used to lower the taxes you have to pay come tax season, meaning you could potentially make your losses back in tax savings.
Before we get you too excited about recovering your losses from the tax man, you need to make sure that your tax jurisdiction considers cryptocurrencies as an asset for the purpose of taxation. Many governments have yet to officially declare their stance, but most – including the US – accept cryptos as assets when it comes to tax time. Sure, this means you need to declare your crypto profits, meaning you could get bumped into a higher tax bracket, but it can also lower your tax bracket if the crypto markets have a terrible year.
Using Capital Loss Legislation
Traditionally, investors who have a large amount of stocks, bonds, or any asset that lost value for that matter could recoup some of these losses via the capital loss laws. This means that if you sell your asset for less than you paid for it you can in fact deduct the tax difference from the tax you owe to the government – pretty neat, right?
How to Benefit from Crypto Bear Markets
In the US, you are allowed to deduct up to $3,000 worth of capital losses from your day job tax bill. This could then push you into a lower tax bracket, giving you a juicy rebate come tax time. For example, if you earn $40,000 at your day job and you deduct your $3,000 crypto losses, you will get pushed down into a lower tax bracket. Instead of paying $4,453.50 and 22% of the amount over $38,701 you will only have to pay $952.50 and 12% of the amount over $9,525. You can see how this quickly becomes quite lucrative if used properly.
Tracking Your Crypto Transactions
Obviously, the more trades you make, the harder this declaration will become. You need to keep a record of every trade you have made in order to properly calculate profits and losses – you can’t just round numbers. There are some great apps out there to help you figure out the taxes you need to pay when it comes to crypto. Zenledger will calculate the taxes you owe on your crypto, making this process as easy as 1-2-3.
In addition to taking money off your day job wage, any capital losses can be removed from all income generated through the sale of assets or via dividends. If worked out properly a crypto bear market can be very beneficial come tax time. If you’re unsure about how to declare your crypto tax income or losses, speak to a taxation professional – it’s better to be safe than have the IRS coming after you.