Cryptocurrency transactions, trades and NFTs can be taxed in the US - learn how offsetting gains from cryptocurrency transactions, trades and NFTs can reduce or possibly eliminate you or your clients' tax liability.
Offsetting your Cryptocurrency gains
Taxes on cryptocurrency gains can be confusing to many people, even for those who study cryptocurrencies and blockchain technology. However, offsetting these taxable events is easier than you might think - this article explains how to offset gains through tax-advantaged investments like capital losses (or tax loss harvesting), charitable donations (of crypto) or by offsetting gains with other losses (e.g., job loss).
Focusing first on offsetting gains through capital losses, the IRS treats cryptocurrency losses just like any other capital loss. If you offset gains from one or more transactions, trades and/or NFTs with a net capital loss for that same year:
- The net loss gets carried over to the following year(s).
- You can apply unused losses against up to $3,000 in ordinary income each tax year
- Any remaining carryover losses can be used in future years assuming you still have offsetting gains.
Capital losses can offset gains of any amount, but gains offset gains of the same type only (so offsetting cryptocurrency sales with sales doesn't work). You can offset long-term vs short-term or business vs personal. However, it all needs to be offset by the same type of gain. E.g., offsetting a trade for one NFT which you held longer than 1 year with another NFT won't work because they are two different types of gains. It will have to be offset with a taxable sale, not another trade or NFT transaction.
You can also offset gains through charitable donations. Let's say you make $10,000 in gains this year. You could offset all of the $10k with a donation to a charity and if you're itemizing deductions, you end up reducing your total taxable income by $10k.
If you want to offset cryptocurrency gains with other losses, here's the process. If your offsetting investments held in a different account, then the first step is to sell enough of those cryptocurrencies to generate offsetting capital losses. Then take those losses on Schedule D as a deduction against your total taxable gain for the year.
The IRS treats cryptocurrency as property so all sales transactions create either short-term or long-term gains/losses depending upon the period of ownership before the sale. For assets held one year or less, it will be considered short-term capital gains and taxed at ordinary income rates up to 39.6%. For assets held longer than one year but sold after two years, it will incur long-term capital gains.
Weeding through the complexities of Crypto Tax
For tax professionals, this is the type of work they do every day for clients. When it comes time for filing taxes on your cryptocurrency, you'll want to make sure to find a tax professional that utilizes Ledgible Crypto Tax Pro. You can also use Ledgible Crypto Tax - Consumer to file your own crypto taxes. The Ledgible platform is the leading tool for filing crypto taxes and minimizing your losses.