In a Nutshell
Crypto investors took major hits in 2018. The number of Credit Karma Tax filers claiming short-term crypto losses on their federal returns during the first month of the 2019 tax-filing season saw steep increases year over year, while the average amount of short-term crypto losses shot up as well, according to Credit Karma analysis.This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma.
While 2017 was a banner year for cryptocurrencies, in which crypto surged 1,200%, it appears many investors did not fare as well in 2018.
The number of Credit Karma Tax filers who reported short-term capital crypto losses in the first month of the 2019 filing season soared by 521% (more than fivefold) year over year.
More early filers with crypto investments claimed bigger short-term losses on their federal returns between Jan. 28, 2019 (when the federal income-tax-filing season began), and Feb. 22, 2019, Credit Karma Tax data shows. Among early filers, those reporting long-term crypto gains seem to be faring the best. (Learn more about our methodology.)
Key findings
| Reported short-term crypto losses averaged $3,405 among Credit Karma Tax filers on their federal returns during the first month of the 2019 filing season — a 322% increase in the average short-term loss from the first month of last year’s filing season. |
| Among Credit Karma Tax filers, crypto investors claiming short-term losses on their federal returns spiked more than fivefold during the first month of the 2019 filing season compared to the first month of the 2018 filing season. |
| Short-term crypto gains declined during the first month of the 2019 filing season, with 33% more early Credit Karma Tax filers reporting short-term crypto gains year over year on their federal returns, but with a net 7% decrease in the average amount of gains. |
| Crypto investors with long-term gains are the winners so far this tax season, with early Credit Karma Tax filers reporting an average gain of $15,352 during the first month of the 2019 filing season — up 103% from the same period last year. |
FAST FACTS
What's the difference between short-term and long-term assets?
If an investor sells an asset they’ve held for one year or less, their gain or loss on the sale is typically considered short term. An asset that’s held more than a year (even if just one day more) before sale will typically result in a long-term gain or loss.
Gains or losses for many types of investments can affect tax liability, and cryptocurrency is no exception.
Short-term gains are generally taxed as ordinary income, meaning the investor would be taxed on their capital gains at the same rate they pay on their other noninvestment income. But long-term gains usually get taxed at the capital gains rate — which is a maximum of 20% but more likely 0% or 15%.
Investors with a capital loss on investment assets may be able to deduct the difference between their capital losses and capital gains from their federal tax obligation. The deduction is capped at $3,000 per year ($1,500 for those who are married but filing separate returns). If their loss exceeds the cap, filers may be able to carry it over to next year’s tax return.
More investors reporting crypto gains and losses than expected
Thus far, more Credit Karma Tax filers have claimed crypto gains or losses on their federal returns for the 2018 tax year than did for the 2017 tax year.
- Filers claiming a short-term gain or loss increased 189% year over year.
- Filers claiming a long-term gain or loss increased 144% year over year.
The fact that reports of crypto gains and losses are on the rise seems to be in stark contrast to what crypto investors said they would do late last year.
A November 2018 Credit Karma survey of more than 1,000 crypto investors ages 18 and older found only about half (53%) of American bitcoin investors were planning to report their crypto gains or losses on their taxes. And more than a third of those surveyed were unaware they could be required to report crypto gains or losses on their tax returns.
Diminishing short-term gains as long game paying off
The average short-term gains claimed by Credit Karma Tax filers on their federal returns during the first month of the 2019 filing season was $1,568, versus $1,689 in the first month of the 2018 filing season — a drop of around 7%.
Investors willing to hold onto their crypto a bit longer fared better, though.
The number of Credit Karma Tax filers reporting long-term crypto gains on their federal returns during the first month of the current filing season increased 35% year over year. And the average reported amount of long-term gains increased 103% to $15,352 for the 2018 tax year.
Methodology
To determine how reported capital crypto gains and losses changed year over year, Credit Karma Tax analyzed members who claimed short- or long-term capital gains or losses for crypto on their federal taxes between Jan. 28 and Feb. 22, 2019, compared to those who filed their 2017 federal income taxes with Credit Karma Tax between Jan. 29 and Feb. 23, 2018. There were no duplicate tax returns analyzed for this study. All percentages have been rounded to the nearest whole.
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.