As the price of bitcoin swelled in 2017, many investors felt like Scrooge McDuck, wallowing in their newfound riches. Sadly for them, though, the yearlong party came to a screeching halt in early 2018. Between January and February last year, the global crypto market shed $550 billion in digital wealth. Some investors lost as much as 96% of their holdings in bloodbath. All told, bitcoin sank from $14,100 on January 1 to $3,870 on December 31, a 73% fall.
Because of crypto’s 2018 collapse, this tax season presents a new challenge for the bitcoin community. Instead of begrudgingly paying taxes on their delirious gains, speculators may now be eager to deduct trading losses. Capital losses are the opposite of capital gains, the taxes the IRS usually collects when a person profits from the sale of an asset.
As it happens, when a person loses money on an investment, they’re allowed to deduct those losses—up to $3,000—from their tax return. This helps offset income and any gains from other, successful investments. If a person’s losses exceed $3,000 in a single year, then they can carry forward the remaining loss, continuing to claim the deduction in later years. (I hate to say it, but maybe the IRS isn’t so heartless after all.)