The IRS categorizes cryptocurrency as property, meaning that cryptocurrency sales, trades, and exchanges are treated similarly to the sale of stocks or other capital assets for tax purposes.
During tax reporting, losses can be classified into two main types: short-term and long-term capital losses.
Short-term losses arise from assets held for one year or less, while long-term losses come from assets held for more than one year.
To report your cryptocurrency losses on TurboTax, you generally need to use Form 8949 to list each transaction and Form 1040 Schedule D to summarize total gains and losses.
Losses from cryptocurrency can offset capital gains from other investments, which can help reduce your overall taxable income.
If your capital losses exceed your capital gains, you can deduct up to $3,000 ($1,500 if married filing separately) of the loss against other income like wages or salaries.
Any excess losses beyond the $3,000 limit can be carried forward to subsequent tax years to offset future capital gains.
Casualty losses, which may apply to cryptocurrency if it involves damage from an identifiable, sudden, and unexpected event, are deductable but are subject to specific IRS criteria.
Theft losses can also be reported in certain cases indicating that the loss was due to a criminal act, distinguishing them from market losses due to hedging or investment volatility.
TurboTax supports importing transactions from popular cryptocurrency exchanges, allowing users to populate their transaction history automatically, simplifying the reporting process.
If you have a large number of transactions (up to 20,000), TurboTax Premium claims to handle this high volume efficiently, easing the track of capital gains and losses.
It’s important to keep detailed records of all transactions, including the date, value, and purpose, to substantiate your losses in case of an IRS audit.
The capitalization of losses occurs when cryptocurrency is not sold, but exposure to value changes affects your investment; losses are purely realized when an asset is actually sold at a loss.
Many cryptocurrency investors may not realize that sending cryptocurrency between wallets can create a taxable event if it is perceived as a sale or exchange.
The concept of "specific identification" can play a role in minimizing tax liability by allowing investors to select which assets to sell based on acquisition cost and holding period.
The use of crypto tax software can help in automatically calculating the tax impact of each transaction and generate the necessary tax forms.
The IRS has increased scrutiny on cryptocurrency transactions, making accurate reporting crucial to avoid penalties or audits.
Understanding "wash sale" rules is also important; while these rules apply to stocks, there is currently no similar provision for crypto, meaning you can sell at a loss and repurchase immediately without restriction on claiming that loss.
Investors should also be aware of differing state tax implications, as some states have unique regulations regarding capital gains and digital assets.
The calculation of basis, or the original value of an asset, is crucial when determining how much of the cryptocurrency's appreciation or depreciation must be reported for taxes.
Staying informed about evolving tax regulations around cryptocurrency is essential, as legislative changes may significantly impact reporting practices and tax liability in the coming years.