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BIT BY BIT

For bitcoin’s losers, there’s a silver lining: lower taxes

Reuters/Jonathan Ernst
Many bitcoin buyers could deduct trading losses this year.
By Matthew De Silva
Published Last updated This article is more than 2 years old.

As the price of bitcoin swelled in 2017, many investors felt like Scrooge McDuck, wallowing in their newfound riches. Sadly for them, though, the yearlong party came to a screeching halt in early 2018. Between January and February last year, the global crypto market shed $550 billion in digital wealth. Some investors lost as much as 96% of their holdings in bloodbath. All told, bitcoin sank from $14,100 on January 1 to $3,870 on December 31, a 73% fall.

Because of crypto’s 2018 collapse, this tax season presents a new challenge for the bitcoin community. Instead of begrudgingly paying taxes on their delirious gains, speculators may now be eager to deduct trading losses. Capital losses are the opposite of capital gains, the taxes the IRS usually collects when a person profits from the sale of an asset.

As it happens, when a person loses money on an investment, they’re allowed to deduct those losses—up to $3,000—from their tax return. This helps offset income and any gains from other, successful investments. If a person’s losses exceed $3,000 in a single year, then they can carry forward the remaining loss, continuing to claim the deduction in later years. (I hate to say it, but maybe the IRS isn’t so heartless after all.)

To claim crypto trading losses, a person must file two documents: Form 8949, to log their trading history, and Schedule D (Form 1040), which tabulates total gains or losses.

Whether you can easily produce a record of trades may depend on your choice of crypto exchange. Coinbase, one of the most popular exchanges, can export a record of trades to TurboTax. Other bitcoin exchanges, like Gemini, only provide tax documents to customers with large portfolios. Prolific traders may prefer to consult a crypto-tax specialist.

When it comes to virtual currencies, taxation is especially tricky. Since 2014, the IRS has defined virtual currencies like bitcoin as property. This means that they’re essentially treated like real estate, with one major exception: After the passage of the Tax Cuts and Jobs Act of 2017, cryptocurrencies are no longer eligible for a real estate-specific tax exemption called “like-kind exchange.” Consequently, as of 2018, every crypto-to-crypto trade triggers a potential tax liability.

As April 15 draws closer, bitcoin’s tax treatment is another reminder that virtual currencies are hardly currencies at all. Few companies or people accept these volatile digital units, and while pro-bitcoin lobbyists have pushed for a tax exemption to encourage its usage as a currency, that proposal hasn’t caught on with US legislators. For now, cryptocurrencies are purely speculative financial vehicles, and that’s exactly how the IRS treats them.

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De-jargonizer

Governance

The cryptocurrency community has a dirty little secret: Every project—no matter its claims of decentralization—relies on software developers, who are responsible for its governance. While crypto lovers would hate the term, that’s a sneaky way referring to management. Oftentimes, management occurs informally, in casual conversations and over video conference calls. Other times, it’s programmatically limited—that is to say, cryptocurrency developers intentionally hamstring themselves by only facilitating upgrades that meet certain standards, such as majority approval, as voted on by a network’s users.

For “decentralized” communities, governance is a double-edged sword. Every effort they make to organize and standardize procedures brings a project one step closer to being a defined entity, rather than loose collective of autonomous actors. How do you run something that’s supposed to be anarchic? It’s a paradox at the heart of crypto.

Please send news and tips to privatekey@qz.com. Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. Everybody plays the fool.