The cryptocurrency market experienced a brutal bear market during 2018, and many investors have now either realized or unrealized losses from their investments in cryptocurrencies such as Bitcoin or Ethereum. Some people might even have invested in outright scams or lost their funds due to exchange hacks. On the positive side, most countries allow you to deduct some of these losses against income to reduce your tax bill. In this article we will explore how different types of losses can be used to claim tax deductions, and if there are any special considerations to make.
Most countries calculate your tax based on the net capital gain from the whole tax year. If you sell your cryptocurrency at a lower price than what you purchased it for, this becomes a capital loss. This can be used to reduce your total net capital gains from investing in cryptocurrencies, or in some cases also used to reduce your capital gains in other types of assets like stocks or commodities.
If your total capital losses exceeds the capital gains, you can even roll the amount forward to future tax years. There are some specific differences between countries with regards to this, so it is adviced to always consult with your local tax office to make sure this rule applies to you.
Coinpanda calculates your capital losses automatically after connecting your wallets and exchanges to the platform. You can even export tax reports that help you claim tax deductions on capital losses from cryptocurrencies.
We have unfortunately witnessed several exchange hacks in both 2018 and 2019. In some cases users lost all their funds that were held on the exchange, and are now maybe wondering if they can claim tax dedcuctions on the losses. It is important to be able to document the funds held on the exchange, and also the actual incident of the exchange hack. In most cases, the exchanges sent out an information letter by email to affected users which you can use to document the incident if requested by your tax office or in case of an audit.
Most countries will consider funds lost from exchange hacks as capital losses, which can then be used to offset your capital gains from cryptocurrency or other types of assets.
Casualty and Theft Losses
We do know today that a significant amount of cryptocurrency is lost forever due to lost access to private keys. Some people have stored large amounts of Bitcoin on their laptop computer in the past when cryptocurrency was almost worthless, only to find out later when prices were skyrocketing that they don’t have access to it anymore. Some people have also been victims of theft in their personal home where burglars might have gotten away with access to their crypto assets.
Similar to exchange hacks explained above, you can most likely deduct some of these losses against income to reduce your tax bill. In the US, however, casualty and theft losses are deductible only if the losses are attributable to a federally declared disaster for tax years 2018 through 2025. These rules apply to individuals and not businesses.
As we have seen in this article, there might be several scenarios where you can claim tax deductions on your cryptocurrency losses from either capital loss, exchange hacks, or casualty and theft losses. If you are a victom of this, it is always recommended to contact your local tax office to make sure you follow the latest up-to-date regulations which can change quite frequently.