Paul L. Caron

Monday, December 31, 2018

WSJ: The Bitcoin Tax Loss Bonanza

Wall Street Journal, Make The Most of Your Failed Bitcoin Gamble: Sell Now:

BitcoinAlmost the only good thing about investing in cryptocurrencies in 2018 was the tax break.

These assets have been crushed this year. Bitcoin’s price, for example, has fallen from about $15,000 to about $4,000.

The U.S. tax code provides a measure of relief by allowing investors to use such losses to offset taxes on winners, either now or in the future.

Digital currencies have a wrinkle that makes them even better in this situation. If you’re still a bitcoin believer, you can use a quirk in the rules to sell and reinvest right away without running afoul of the Internal Revenue Service. By contrast, many stock and fund investors have to wait 30 days to repurchase losers.

Now is a good time to learn more if you invest in cryptocurrencies, as the IRS is cracking down on abuses. It is pursuing criminal cases involving crypto, and earlier this month an official said the agency has seized its first crypto wallet in a civil case. ...

Driving much of the tax treatment of crypto is a 2014 IRS notice. It held that cryptocurrencies are often investment property, such as stocks and bonds, and not currency. The U.S. tax code has special and often favorable treatment for investments.

Under these rules, no tax is due when an investor buys or holds a cryptocurrency. After a sale, the investor determines whether there’s a profit or loss by subtracting the purchase price plus adjustments from the selling price. So it’s important to keep good records of transaction dates and prices of different lots.

Short-term gains and losses are from investments held a year or less, and these gains are taxed at rates up to 40.8%. Long-term gains and losses are from investments held longer than a year; they have favorable rates that top out at 23.8%.

As an investment, crypto has other key benefits. Losses can offset taxable gains—even on other investments such as stocks or land. Up to $3,000 of losses can also offset income such as wages, and unused losses carry forward for future use.

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