The cryptocurrency market can change very fast. Many investors have faced big losses, especially during recent market drops. If you are one of the many crypto investors in San Luis Obispo who has lost money on digital assets, it is important to learn how to report these losses on your tax return. This is because your losses can reduce your tax liability.
Crypto transactions can be confusing. You may trade on different platforms, use DeFi protocols, or buy and sell NFTs. However, crypto does not usually provide standard reports for tax purposes. Also, many people do hundreds or even thousands of crypto transactions each year. Therefore, keeping track of each of those transactions is crucial.
If you live in San Luis Obispo and have invested in crypto, you have to know how to account for your losses for two reasons– to remain compliant and to save money on taxes. This is where expert CPA services in San Luis Obispo can be a lifesaver. A tax professional can make sure you follow the IRS rules and get all the tax benefits you can.
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How your crypto losses can lower your taxes
When you lose money on cryptocurrency, the IRS considers your digital assets like property and not money. Therefore, just like stocks or other investments, you can use your crypto losses to reduce the amount of taxes you owe by offsetting your capital gains (profits from other investments).
Before you do this, you have to figure out the difference between what you paid for the crypto and how much you got when you sold or got rid of it. According to the IRS laws, there are two main ways to use your crypto losses:
- You can subtract your crypto losses from the gains you made on other investments, like stocks, real estate, or other crypto profits.
- If your total losses are more than your gains, you can deduct up to $3,000 from your regular income each year. On the other hand, if you lose more than $3,000, you can carry forward the extra amount to future years. This means you can keep getting tax benefits in future years, too.
Common challenges and pitfalls
One common challenge most crypto investors face is keeping track of their transactions across different platforms. It can be hard to figure out the correct cost basis (what you paid for your crypto) because exchanges do not always give you complete tax forms. This makes it challenging to gather all your transaction details.
Another big challenge is choosing the right method to calculate your cost basis. The IRS lets you use methods like First-In-First-Out (FIFO) or Specific Identification. The other methods available, such as such as Last-In-First-Out (LIFO) or Highest-In-First-Out (HIFO), might not be accepted. If you use the wrong method, you face problems during an audit and might face extra taxes and penalties.
How to keep records and report your crypto losses
When it comes to reporting your crypto losses, it is important to keep accurate records. You have to report everything to the IRS every time you sell or get rid of cryptocurrency, whether you made money or lost money. This means you need to record every detail, including:
- the date you bought the crypto,
- how much you paid (cost basis),
- the date you sold it, and
- how much you received.
You will have to fill out Form 8949 and Schedule D of Form 1040 to report your crypto losses properly. Make sure to list each sale on Form 8949. Additionally, you will require separate forms for short-term and long-term holdings.
Facing crypto losses? Save on taxes now!
Have you lost money in crypto? You do not have to let those losses go to waste. Expert CPAs in San Luis Obispo can help you report accurately and maximize deductions!
