Claim your crypto losses
Disclaimer: This is not tax advice. For tax advice, you should consult with tax professionals.
The purpose of this article is to illustrate how a simple crypto transaction: Buying one crypto with another crypto may generate something that the US authorities consider as a taxable gain or loss, also called a tax event.
For the purpose of this article, we will assume the following transactions:
- First transaction is: buying Ethereum (ETH) with US dollars
- Second transaction is: buying Lumens (XLM) with Ethereum (ETH) a day later
In the real world, what's happening is that the day you bought ETH, ETH price was let's say, $600 a piece (remember HODLERS from the last crypto winter? )
So you spent $600 to acquire 1 ETH. You didn't think much about that ETH price because your target was to buy XLM. Back then XLM couldn't be bought directly with US dollars, hence you bought ETH as a pivot.
A day later when you finally complete your purchase of XLM using ETH, the USD price of ETH has dropped to $580 a piece... Not a big deal, because now you got your XLM and you are no longer concerned with ETH pricing.
Well the US tax authority: the IRS, thinks differently.
Because they consider cryptos as a property rather than a currency, the price change in the above transactions creates a tax event! In this case a loss that can be claimed against capital gains.
Here is an example.
In short because you have disposed of a $600 ETH position at a moment where it was only valued $580, to acquire another crypto, from a US tax standpoint you have a claimable Realized loss of ($20).
From a performance standpoint, I would consider this more as an Unrealized Loss. As ETH and XLM are subsets of a same investment: crypto currencies, I would argue that it is only when you exit the investment that you would calculate a realized loss.
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From a performance standpoint, I would consider this more as an Unrealized Loss. As ETH and XLM are subsets of a same investment: crypto currencies, I would argue that it is only when you exit the investment that you would calculate a realized loss.
European Tax authorities seem to lean toward this approach rather than the US approach. Anyone cares to comment?
If we were to flip the above example and say that when you used your ETH position to buy XLM, the ETH/USD price had raised to $620, from a US tax standpoint you would now have a taxable Realized gain of $20.
In all cases make sure to identify crypto transactions that have created such taxable gains/losses in your crypto portfolio and consult with tax professionals to see how those can be incorporated in your tax filings.
If we were to flip the above example and say that when you used your ETH position to buy XLM, the ETH/USD price had raised to $620, from a US tax standpoint you would now have a taxable Realized gain of $20.
In all cases make sure to identify crypto transactions that have created such taxable gains/losses in your crypto portfolio and consult with tax professionals to see how those can be incorporated in your tax filings.
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