We realize the last thing you want to hear about when it comes to crypto is taxes. But with the season upon us here in the United States, we wanted to make sure you were fully informed. So we asked our NYC neighbors over at TokenTax to help break things down for our users here and around the world.
With many exchanges pursuing regulation, and tax authorities worldwide on board as well, you’re likely liable for crypto taxes. From the IRS’s full involvement in the US to Denmark’s tax authority retrieving KYC and transaction info from certain Danish exchanges, it’s becoming more evident that taxation will be enforced as the market matures.
Crypto has been in a bear market, and as beautiful as Quadency’s dashboards and charts are, we’re hoping to see more green. But there’s a silver lining: you can deduct crypto losses from your income in your tax return and even carry your losses over to future years.
Deducting your crypto losses
If you had more losses than gains in the tax year, you can deduct up to $3,000 in losses on your tax return. Losses beyond this amount carry over to the next year, so if you report losses for 2018, and then make gains in 2019, you can use carried over losses to reduce capital gains.
Using capital losses from cryptocurrency to offset capital gains income doesn’t just apply to crypto either — from your crypto losses, you can offset gains from other capitals gains like stocks and real estate. Beyond that, up to $3,000 in losses can be deducted on your tax return against other income sources. This is per the IRS for the U.S., but similar provisions apply worldwide.
Choose your accounting method wisely
Furthermore, the accounting method you implement has a direct effect on your tax liability. Minimization is the process of choosing the accounting method that optimizes your tax liability as much as possible — a feature TokenTax offers in addition to calculating your crypto taxes. How does minimization work?
Imagine you bought 3 BTC:
1 in July 2017 for $2k.
1 in April 2018 for $7k.
1 in November 2018 for $5k.
You sell 1 BTC in December 2018 for $4k.
Your taxable gain is calculated by the proceeds minus the cost basis (the amount you originally bought the bitcoin for).
First in, First out (FIFO) and Last in, First out (LIFO) are popular accounting methods for calculating gain because they are the simplest. They determine which cost basis corresponds to a sale. Let’s see them in action:
FIFO: $4k - $2k (July 2017 cost basis) = $2k gain
LIFO: $4k - $5k (November 2018 cost basis) = $1k loss
Let’s see this with tax minimization, where the best cost basis is chosen for reducing tax liability.
Minimization: $4k - $7k (April) = $3k loss
Presenting a higher loss on your taxes let’s you reduce your capital gains and beyond that, deduct more from your tax return. Keep in mind, however, that there are times when you’ll possibly want to trigger the gain to get it out of the way — perhaps you expect moving to a higher tax bracket soon, or maybe you expect BTC to hit a new all time high in the near future. Or perhaps FIFO will make more of your trades long term, thus taxed at a lower rate.
As is the case with many facets of crypto taxation, the IRS has not outlined strict policy for accounting methods to use specifically with crypto currency, as crypto is still classified as property. Internationally, it varies — the UK, for example, only allows for average cost accounting.
How do I figure out what’s best for me?
TokenTax’s patent-pending minimization algorithm examines your all trades and finds the best method to reduce your tax liability. Like Quadency, TokenTax uses API keys to seamlessly integrate trade data into its system. Then, tax reports for your crypto are created and can be included in returns. Tax assistance and even full service filing is available as well.
Crypto trading losses — and taxes — aren’t the end of the world! Be smart in reporting losses in your taxes and your life will be much better. Tax policy regarding crypto will continue to evolve, so getting into the habit of accurately recording and reporting your transactions will help you in the long run.
Thanks to the TokenTax team for sharing this guide with Quadency's users!