Bitcoin investors took a massive hit in 2018 – and, according to personal finance company Credit Karma, most of them don’t realize they can write off the losses on their tax returns.
According to a report in MarketWatch, citing Jagjit Chawla, general manager of tax at Credit Karma, U.S. investors lost $1.7 billion in bitcoin investments last year and had unrealized losses of more than $5 billion.
Credit Karma surveyed bitcoin investors to get a sense of how they plan to treat the losses and gains on their taxes. Most aren’t gearing up to claim a deduction for the realized losses, even though they are entitled to do so.
“Even though those who sold their bitcoin at a loss can typically claim a tax deduction, we found that before taking our survey, 61 percent of respondents who lost money on bitcoin didn’t actually realize they could get a tax deduction for bitcoin losses,” said Chawla. Once the customers found that they could deduct the realized losses, only 58 percent said they would do so, noted the report.
According to the report, Credit Karma found that more than half of the survey respondents thought the gains or losses were too small to report as a deduction, while more than one third said they didn’t think they had to file tax returns on bitcoin and one fifth didn’t know how to take the deduction. In an interview with MarketWatch, Credit Karma’s Chawla said the lack of education surrounding taxing cryptocurrencies is a big issue. Many investors, he said, don’t know the penalties that could come from not reporting tax gains or losses on bitcoin or other digital currency.
Gary LaRoy, enrolled agent and crypto tax specialist at CryptoTaxProEZ, told MarketWatch that ignorance about the law and ignorance on the part of the tax industry is why people aren’t filing cryptocurrency returns. “If you ask the average tax [accountant], they don’t know anything about it and they’re not asking about it. They’re doing a disservice to their clients,” he said.
LaRoy added that a strategy he recommends for clients is to engage in tax loss harvesting, in which the investor would sell a crypto asset at a loss to offset the gain from another asset. After the wash rule period passes, the investor would purchase the crypto asset again to get back into the desired position, reported MarketWatch.