In 2018, there was a severe bear market on the cryptocurrency market, and many investors have since either realized or unrealized losses from their investments in cryptocurrencies like Bitcoin or Ethereum. Some customers may have even lost money as a result of exchange hacking or invested in outright scams. On the plus side, you can now deduct some of these losses from your income to lower your tax obligation in the majority of countries. In this post, we’ll look at the various losses that can be claimed as tax deductions and see if there are any unique factors to take into account.
Monetary losses
The majority of nations base their tax calculations which are now possible using multiple crypto tax tools on the net capital gain for the entire tax year. A capital loss occurs when you sell your bitcoin for less than what you paid for it. This can be used to lower your overall net capital gains from cryptocurrency investments, and in some situations, it can also be used to lower your capital gains from investments in other asset classes, such as stocks or commodities.
You may even carry the excess over to subsequent tax years if your overall capital losses exceed your total capital profits. To ensure that this law applies to you, it is advised to always check with your local tax office because there are some unique distinctions between nations in this regard.
Exchange phishing
Unfortunately, we have seen a number of exchange hacks throughout 2018, 2019, and 2021. Users who lost all of their money on the exchange in some situations may be wondering if they can get tax deductions for their losses. It’s critical to be able to prove both the existence of the exchange’s cash and the specifics of the hacking incident. Affected consumers were typically sent an information letter by email from the exchanges, which you can use as proof of the occurrence if your tax office or an auditor asks for it.
Most nations will classify monies lost as a result of exchange hacks as capital losses, which can be used to reduce capital gains from bitcoin or other assets.
Losses from theft and casualty
Today, we are aware that a sizable portion of bitcoin is permanently lost as a result of lost access to private keys. When cryptocurrencies were essentially worthless in the past, some users kept significant sums of Bitcoin on their laptops, only to discover later that they no longer have access to it as prices skyrocketed. Some people have also been the victims of theft in their own homes, where the intruders may have made off with their cryptocurrency valuables. You can probably offset some of these losses against income, much as the exchange hacks mentioned above, to lower your tax obligation.
However, in other nations, theft and casualty losses are only deductible if they can be linked to a disaster that has been officially proclaimed by the government for the tax years 2018 through 2025. Individuals are subject to these regulations, not businesses.
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