Well, it’s been a pretty rough past year in the crypto markets. From a high of $19.5K on December 16, 2017, Bitcoin has fallen 78% to its current price of $4.3K as of this post. Ether has collapsed from $1,400 on Jan 13 of this year to $123 on Nov 24. Most altcoins have fared even worse.So, what’s the upside? Well, it would take a CPA to find one. The upside is that there may be some selling strategies that you can implement between now and the end of the year to reduce this year’s tax bill. Let’s discuss a few.If you bought before prices took off late last year you might still be in the black – that is current values might exceed what you paid for your coins/tokens. However, if you were one of the many who caught the crypto bug in November or December 2017, you may be sitting on significant unrealized losses. Read on.
Step 1 – Create an Inventory of your Current Holdings. This could be simple or difficult, depending on how creative you’ve been over the last year and how organized you are. If you are like a lot of people, you have traded on many exchanges, you have participated in ICOs, you store crypto on various types of wallets, you have done mining, made and given gifts of crypto, made payments using crypto and been paid with crypto, and, and, and…..If you love organization, you’ve been using a tracking tool like CoinTracking.info, or a spreadsheet, or at least a scrap of paper to keep track of your holdings. If you don’t love organization, then now is the time to start. Make a list of any place where you might have stashed a coin. Then access each location. Compile all of your transactions in one file. Date, trading pair, price, etc. The result is a list of your current holdings and every transaction that got you there. Simple, huh?If this isn’t the way you want to spend a weekend, there are people and firms (such as KTT Global Advisors, LLC) that actually enjoy doing this. It might be worth a few bucks to know that you have an accurate inventory.
Step 2 – Calculate your YTD Gains and Losses. If you have completed Step 1, Step 2 should be relatively straightforward, especially if you used a tracking tool. Gains and losses will be categorized as short-term (less than a year) or long-term (greater than a year).
Step 3 – Gather your Other Capital Gains and Losses. This is an important step. The main reason is that capital gains and losses can offset each other, to arrive at net capital gains or losses. So, take “stock” of any transactions involving:
stocks and bonds
any other assets mentioned in the instructions for Schedule D
Again, a CPA or other tax professional can be a great help with this. One thing that people forget about is that carryovers of capital losses from prior years can be used to offset current gains. So, check last year’s return; if you have anything to use there will be a worksheet that calculates capital loss carryovers based on the guidance found in Pub 550. The basic rules of calculating capital gains and losses are: short term gains and losses offset each other (include carryover losses), and long term gains offset each other (include carryover losses). Then, to the extent that net short-term and net long-term gains or losses can offset, they do. For example, if you have $3,000 of net short-term gains and $1,000 of net long-term losses, and a carryover of $1,000 of long term losses from prior year(s), you will report a net $1,000 short term gain on your Schedule D.
Step 4 – Determine What Other Transactions to Make this Year. Once you have your capital asset inventory and have calculated your current position, you can decide what, if any, actions to take between now and the end of the year. You may find that if you traded a lot at the beginning of the year, you are sitting on large realized gains and associated taxes, the latter of which your current crypto holdings are not sufficient to cover. Despair not – a good tax crypto tax program can tell you your current unrealized gains and losses, from which you can identify selling opportunities. What if you are convinced that Bitcoin is going to moon in December, and you don’t want to sell at all? You could argue that “wash sale” rules that apply to stock trading do not apply to crypto. This is based on a strict interpretation of Sec 1091 of the Internal Revenue Code, which states that wash sale realized losses are only disallowed for “disposition of shares of stock or securities”. Well, the IRS has stated that crypto is property, not a security (don’t confuse this with the SEC’s position). So until the IRS classifies crypto as a security, or Congress expands Sec 1091, people who believe that wash sale rules do not apply to crypto have an argument.
One last point is that after performing these trades you are in a net “zero” position (no reported gains or losses), and still have some unrealized long term or short term losses, you may want to consider selling in order to recognize up to $3,000 in further losses. This is because up to $3,000 in capital losses can be carried through to your 1040 to offset other types of income, such as W-2 (full-time job) or 1099 (consulting) income. Using long-term losses will be more beneficial, as you are offsetting income taxed at regular income tax rates with losses that normally would offset capital gains that are taxed at lower rates.
Step 5 – Maybe You Should Report Your Activity from Prior Years, After All….. This isn’t really an extra step, but more something you should consider if you might have some prior year losses to bring forward to the current year, or you’ve just decided that you want to play it safe and report your crypto activity. If it is the former, then the benefits may outweigh the costs of the amended filing and any penalties that might come about. Note that isn’t an encouragement to avoid your responsibility of accurately reporting income. I don’t accept clients who will not report their crypto activity in a year for which I am doing their taxes. But I am not your CPA for any of the years you did not report. So, be aware that there are advantages – financial, peace of mind, etc., for tidying up the past.
-> The Blockchain CFO