There are many benefits to owning and trading crypto. One such benefit is the ability to harvest a tax asset should you lose money on your investment. The U.S. Government wants to reward innovation and risk-taking investors. That means if you lose money on an investment, the tax code will help soften the impact on to your wallet.
As we all know, the 2018 bear market felt pretty harsh after the incredible growth in 2017. Recognizing losses on crypto is one of the best ways to make the most of our current situation. If you had recognized losses in 2018, are you claiming that loss against your other investment gains (capital gains) or against your income taxes?
How to Claim Up to $3000 Off Your Income Taxes with Tax-Loss Harvesting and ZenLedger
1. Use ZenLedger so that all transactions are recognized and reported. See more about how to use ZenLedger here.
2. ZenLedger will generate Form 8949. Short term crypto trades will be on Page 1 with Box C checked. The net short term loss will be on Page 1, Line 2. Long term crypto trades will be on Page 2 with Box F checked. The net short term loss will be on Page 2, Line 2.
3. The 8949 output from ZenLedger will populate your will populate Schedule D. Short term loss will be on Part I Line 3; long term loss on Part II Line 10.
4. The net loss that you can use to deduct against other income will be on Schedule D, Part III, Line 21. Assuming your net losses are greater than $3000, this number will be $3000. If you have gains and losses from other assets, like stocks or property, they will also be reported on the Schedule D form.
5. The number from Line 21 on Schedule D then goes to Schedule 1, Line 13.
6. Schedule 1 is totaled and then goes to Form 1040, Line 6 first. (See an example of the form here.) If there are no other items on Schedule 1, this number is $3000 loss.
7. When totaling line 22 on the 1040 form, subtract your $3000 loss recorded on sub-line 6, and you are complete!
Phew. That was a lot of form names. I bet many of you are using TurboTax? Since ZenLedger is an official TurboTax partner, much of this will happen in the background for you.
Once you import all of your transactions to ZenLedger, you can download a TurboTax-ready file. This will populate the 8949 form for you, and pass that data along to inform your Schedule 1 and Schedule D. TurboTax will read your crypto losses and automatically apply the maximum tax asset available to you.
And that's it! As long as you recognized a loss on your Crypto in 2018, those losses can be applied to capital gains taxes from other assets (like stocks or property) or towards your income tax, if you didn't have other investments.