Learn How to Claim Tax Deductions on Crypto Losses

Learn How to Claim Tax Deductions on Crypto Losses

September 27, 2019

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.

Capital Losses

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.

Exchange Hacks

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.

Conclusion

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.

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

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How to Store Your Cryptocurrency Safely in 2020

How to Store Your Cryptocurrency Safely in 2020

February 28, 2020

We covered how to buy cryptocurrency in this guide, but equally important is what you do after you have acquired any crypto assets. Storing your cryptocurrency safely is of utmost importance and something that should be of top priority by every crypto investor. This article will guide you through how to protect your funds, how to choose the right wallet, and what you need to consider to stay secure and prevent theft or losses.

Cryptocurrency Wallets

If you already own any type of cryptocurrency, chances are that you have also interacted with a cryptocurrency wallet. They are essentially a software program that lets you send and receive digital currencies, and stores your public and private keys. You can also use a wallet to monitor your balance of crypto assets.

In general we categorize wallets into either hot or cold.

  • A hot wallet is connected to the internet and can be accessed at any time
  • A cold wallet stores your funds offline, and is thus not connected to the internet

Typical hot wallets are exchanges, online cloud based wallets, and most mobile and software wallets.

The most widely used cold wallets are hardware wallets, but also paper wallets and other offline data storage devices.

People actively trading the cryptocurrency market might prefer to use a hot wallet because of the accessibility it provides, while long term investors and other people that don’t require ready access to their funds usually prefer a cold wallet because of increased security.

Types of Wallets

We can generally put cryptocurrency wallets into four distinctive categories: paper, cloud based, software, and hardware wallets.

Paper Wallets

A paper wallet is most often a physical copy or print of your public and private keys, and is therefore considered cold storage because it is not connected to the internet. You can sometimes generate a paper wallet from a software wallet, such as a digital file you can print or save somewhere safe. To use your paper wallet you can either import the digital file into a software program or scan the QR code with any compatible mobile application to get access to your funds.

There are many different paper wallets that exist today, and for the most popular cryptocurrencies you have probably several options to choose between. MyEtherWallet is a very popular wallet for Ethereum and all supported ERC-20 tokens. If you want to store your Bitcoin on a paper wallet, you can generate one from the Bitcoin Paper Wallet website.

Paper wallets are considered to be cold wallets, but they do come with risk specifically for this type of wallet. If you have your private keys on a physical print you must make sure that it does not get damaged in any way. They are also easy to copy, so you will need to keep them in a safe place that other people don’t have access to. It is good security practice to have multiple copies and store them in different locations.

Some people keep electronic copies of their paper wallet on a computer, but this is obviously a bad idea for several reasons. As long as your computer is connected to the internet, it is essentially a hot wallet. If you store your private keys on a paper wallet you should always make sure it is kept offline.

Cloud Based Wallets

Cloud wallets are always hot wallets. With these types of wallets you can access your crypto assets from basically any computer or device with internet access. You should always consider the risk of having your private keys controlled by a third party before sending your cryptocurrency to a cloud wallet. Some of the popular wallet providers today are:

  • Guarda
  • Coinbase
  • Metamask
  • Blockchain.com

Software Wallets

Software wallets are downloadable programs that you install on your computer or mobile phone. Since your computer or phone is in most cases always connected to the internet, such wallets are considered to be hot. Hackers and computer viruses are becoming more sophisticated every day which is something to consider before you decide to install a software wallet.

This type of wallet has often a very user-friendly interface to manage your digital assets, and some wallets also lets you access your cryptocurrency from different devices at the same time. Some of the popular software wallet providers today are:

  • Jaxx
  • Exodus
  • Electrum wallet
  • Mycelium

Hardware Wallets

Hardware wallets are considered cold wallets and provide one of the highest levels of security today. These wallets store your private keys on an encrypted physical device which might look like a USB memory stick. Some of the wallets today lets you send, receive and manage your cryptocurrency from a web interface or software program on your computer, all while still being considered a cold wallet.

The user experience has become better in recent years, and it is now fairly simple to perform transactions even for beginners. Generally, you just plug the device into any computer or mobile phone connected to the internet, and you are ready to send or receive cryptocurrency. These wallets are considered to be one of the most secure ways of storing digital currencies today.

The most popular hardware wallets on the market today are:

  • Ledger
  • Trezor

It is important to consider from where you buy a hardware wallet. Best practice is to always buy directly from the manufacturer to reduce the risk that your device has been tampered with. Even when doing so you should also always reset the device before you use it.

After setting up the hardware wallet for the first time you will likely be asked to make a backup of your private recovery seed phrase. In case you lose the device, or it gets damaged in any way, you can restore your wallet to a new device using the recovery seed phrase. Most people write the seed phrase down on a piece of paper which they store in a secure location no other people have access to. There are also other ways to secure your seed phrase like indestructible titanium plates for example.

Best Security Practices 101

After reading this article you might consider to take ownership and control of your cryptocurrencies using a private wallet. This is a great step, but you must also consider how to keep your assets secure in the future as well.

These are some of the most important security practices to consider:

  • Don’t keep cryptocurrency on exchanges unless you plan to trade in the near future
  • Always enable two-factor authentication (2FA) if possible
  • Don’t brag publicly about your crypto holdings which could attract thieves or burglars
  • Use a hard to guess pin code with your hardware wallet
  • Make sure to avoid malware and reduce the risk of getting viruses on your computer

We hope this article was a valuable introduction to how you can store your cryptocurrency safely today. Security is something that should be on top of every crypto investors priority list, and it is important to always consider the risk of your wallet being compromised.

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

TRY US

Need help to figure out your crypto taxes?

Join Coinpanda today and generate tax reports in less than 15 minutes.