How Reporting Crypto Losses on Your 2022 Taxes Could Be a Win | The Motley Fool

many cryptocurrencies such as bitcoin and ethereum soared to all-time highs in 2021. people who invested before 2021 made big profits.

But that hasn’t been the case in 2022. Cryptocurrencies have taken a hit, meaning you may have to sell at a loss if you dump your assets.

Reading: Bitcoin losses taxes

Losses don’t always have to be a bad thing if you know how to turn them into gains on your tax return. We’ll break down how cryptocurrency taxes work with tax loss collection so you can lower your tax bill this year.

how are cryptocurrencies taxed?

Crypto market losses can feel like a slap in the face until you discover tax loss harvesting. This strategy allows you to lower your tax bill by offsetting capital gains against capital losses. Since the IRS classifies cryptocurrency as property, the crypto tax rate follows the same capital gains and losses rules that apply to stocks.

Let’s say you invested $10,000 in bitcoin and dumped your cryptocurrency when it hit $30,000. he would have to pay taxes on crypto profits of $20,000. you incur a capital gain when you sell cryptocurrencies at a higher price than you originally paid. That original investment amount is usually referred to as your cost basis.

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but if you sell cryptocurrencies at a lower price than you originally paid, you have a principal loss. Through tax loss collection, your crypto losses can offset your other crypto or stock market gains. If your losses exceed your gains, you can take up to $3,000 in losses to offset your ordinary income. any additional loss is carried over to the following year. tax loss collection rules make it easier to reduce your tax bill now and in the future.

can you benefit from tax loss collection?

Before you get too excited about the idea of ​​tax loss collection, make sure you meet the requirements.

First, you can only use tax loss collection on a taxable investment account. if you hold crypto in a self-directed rage, you will not be able to enjoy the benefits of tax loss collection.

You must also have a realized loss to qualify for tax loss collection. Let’s say you haven’t sold any of your cryptocurrencies this year, but you see sharp declines in your portfolio. that means you just have a loss of paper. you do not have a realized loss until you dispose of your cryptocurrency. therefore, you are not eligible to take advantage of tax loss collection.

turn your crypto loss into a tax win

If you made mega-profits from one cryptocurrency, you can offset your gains against losses from another cryptocurrency. if you had gains in the stock market, your crypto losses could offset those amounts as well. this allows you to reduce your tax liability.

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let’s say you bought $10,000 worth of ethereum in 2020 and sold it for $30,000 in 2022. that’s a $20,000 capital gain. on the other hand, you had a $40,000 loss on your long term investment in bitcoin when you sold it. Since your capital losses exceed your gains, you don’t have to worry about paying taxes.

You will also have the opportunity to use up to $3,000 of your capital losses to offset ordinary income. in this example, you will end up with an excess loss of $20,000. after using the $3,000 loss in the current year, you can carry over the remaining $17,000 to future years until you have exhausted your loss basket.

how to file crypto taxes

If you sell cryptocurrency in a taxable investment account in 2022, you will be responsible for paying taxes on your earnings. You will also need to report your crypto losses if you want to take a tax deduction. You can report your capital gains and losses from your crypto transactions on the IRS Crypto Tax Form 8949.

you will need to provide the following:

  • name of the cryptocurrency you sold
  • date you bought your cryptocurrency
  • date you sold your cryptocurrency
  • price you sold for your cryptocurrency
  • cost basis
  • profit or loss

Your broker or cryptocurrency exchange will send you the 1099 form, which will have the details you need to fill out the 8949 form, so you won’t have to create the numbers from scratch. After completing Form 8949, you will need to transfer the required information to Schedule D to determine your capital gain or loss.

don’t take your crypto tax earnings for granted

If you suffered huge crypto losses on paper, this is no time for a pity party. You can keep your investments or use tax loss harvesting to reduce the impact of any gains on your portfolio. decide which strategy works best for your portfolio and set yourself up for a win no matter what happens in the markets.

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