Year-End Cryptocurrency Tax Tips


It’s almost the end of the year, and that means it’s time to think about wrapping up the narrative that you’re going to reveal in your annual tax filing.

For cryptocurrency investors, that can be complicated. You’re putting in your cryptocurrency capital gains or losses with other income, hopefully, – you might have a 9-to-5 job, or your own business with a schedule C set up. You may have real estate gains or losses, or other items to factor in as well.

Here are some actionable tax tips from the experts on what to do to get all your ducks in a row for 2018’s tax year.

Organize Revenues and Expenses

One of the first steps is to figure out what you gained and what you lost during the year. With this birds-eye view in hand, you can make specific decisions about how to minimize your tax burden in April.

Just like a city government or other municipality, you’re weighing revenues – income and capital gains – against expenses – business expenses or capital losses.

You’re also dealing with that good old IRS 1040 and everything that becomes attached to it for a household filing. The reason we call this a “narrative” is that it tells the story of your finances during the year. It also tells the story of your net worth and how you sell your labor or other assets on the market.

With that in mind, here’s another major tip for cryptocurrency investors as the year comes to an end.

Work to Offset Gains

There’s an interesting principle that comes into play in down markets and any time that one of your investments loses value.

It’s the idea of minimizing tax burdens by offsetting gains using existing losses.

Almost all significant cryptocurrencies lost major value during 2018. Crypto leaders like Bitcoin and Ethereum lost around 80%. That’s bad news for your portfolio, but it’s also a way to offset other investments that may have gained over the year.

By selling a portion of your down crypto, you can tack on a capital loss that can take a big bite out of your taxes. How you do this depends on your specific income and tax situation, but in general, experts talk about harvesting losses by simply shedding stake in an investment that has lost value.

There’s another additional tip here – although the IRS has something called a “wash rule” that applies to securities, it doesn’t apply this rule to crypto coins. That means certain kinds of short-term trades are possible with coins that would not be possible with stocks.

With other kinds of financial products, investors are barred from dumping equities as they lose value in the short term and repurchasing them within 30 days. However, with crypto coins you can sell on the way down and buy at the bottom. That’s a concrete advantage for getting into the crypto market.

Add On Top-Level Deductions and Business Expenses

As you’re trying to minimize your capital gains with losses, you can also take your tax bill down even further by making top-level investments that come right off of your 1040 income.

Retirement account deposits are a prime example. This money comes right off of your tax bill, so it’s a good idea to think about shuffling several thousand dollars of your gains into your retirement account before the end of the year, although some investors may have until filing in April.

Other top-level expenses include moving expenses, some forms of student loan debt and other costs that can be subtracted off of what you earned or received in capital gains during the year.

It’s also important to note that a net capital loss carryover can apply to multiple tax years.

Look at New Options and New Technology

As you fine-tune your strategy for the end of the year, start looking at next year. Understand how cryptocurrency roles are changing – for example, although investors at the moment have to pay tax on exchanging one type of cryptocurrency for another, there is legislation underway right now to change that. The Token Taxonomy Act of 2018, if passed, would allow some types of coin-to-coin investment activities without taxation.

So looking at the context is another important part of doing this important year-end work.

Think about how these strategies can benefit you next April when you file your taxes.