The reporting in your TaxBit account can look very different when you participate in contract trading than what you might expect with traditional trading and the impact it has on your capital gains and losses.
What is Contract Trading?
TaxBit considers Contract Trading to be an umbrella that contains many different types of alternative transactional activity outside of traditional Spot Trading. Some examples would include Margin, Futures, Leveraged, Options, etc. If you are not trading assets you can immediately move around to other sources, you are likely participating in what TaxBit considers, Contract Trading.
How is Traditional Trading Reported?
To start, let's establish how your traditional trading is reported, and better understand the foundation of what most people expect to see in their TaxBit account. When you acquire a capital asset, and then later dispose of that asset by selling, or trading it for another asset you end up realizing a gain or a loss. TaxBit's Tax Engine will take your cost basis from the initial acquisition, and subtract that from your proceeds to identify a gain or a loss.
How is Contract Trading Reported?
Any time you dispose of a capital asset, the IRS expects you to report that gain or loss amount. This includes when you dispose of cryptocurrency in exchange for a service. In the case of contract trading, you are not actually exchanging crypto back and forth, but rather you are realizing a profit or a loss in crypto (or sometimes USD) based on the price of crypto, and the movement of the market. This type of trading is particularly disadvantaged to you on your tax reporting, because these actions are not like the simple traditional trading we discussed above. Instead, you are etiher realizing a profit (reportable income) or realizing a loss (reportable expense).
While the common assumption is that a realized loss would balance out your Capital Gains or Losses the truth is it's not quite that simple. An Expense transaction type, can actually result in a capital gain or a loss.
Real World Example:
If you acquire .001 BTC for $25, and later lose that .001 BTC in contract trading, what would be the result that is reported to the IRS? The answer depends on the value of the BTC at the time of the loss, because the IRS expects you to report the capital gain or loss. If that .001 BTC was worth $50 at the time of your realized contract trading loss. Then your form 8949 would show a capital gain of $25 even though you technically lost the entire value.
How can I report my losses if they don't show up on my 8949?
Even though the 8949 is not designed to report this type of loss from contract trading, it's still technically possible for some people to report these losses. Recent tax law changes have made this more difficult for individuals though.
These losses can be reported as a deduction against your income on your tax return. This option allows you to balance out the realized profits from your profit trading, and also to balance the realized gains that many people are reporting on their 8949 due to the increased value of their assets before they are spent on contract trading.
Many individuals will have a hard time taking advantage of these losses though, as they will not be able to surpass the standard deduction amount set by the Government for individuals. If you are interested in exporting a report that allows you to sum up your losses from contract trading, you can do this with your TaxBit account. Simply use the filters on the my transactions page as follows.
Any Type: Expense
Any Source: Exchange where you completed contract trading
Any Date: The year you want to generate a report for
Once you have these settings selected, please select the "Export Transactions" button, and a CSV export will download to your computer. Column "I" (Market Value) contains the fair market value of the assets when you disposed of them, which can be summed up and used to report as a deduction against your tax filing for the year.
What should I do now?
One recommendation we can make here at TaxBit, is that you consider the skewed taxable impact of contract trading before participating in it any further. Your gains will immediately be taxable, and your losses will be challenging to account for, for many individuals. If you are looking for ways to minimize the gains on your 8949, we recommend you check out our blog on tax loss harvesting from our Tax Attorney, and see what you can do to minimize how much you need to report as a gain in the future.