If you buy something and then sell it as a loss, you're able to 'take a loss' on your tax return and use the loss to lower your income for the year (you can only take a loss of 3000 per year on your return, so if need be you'll continue to carry forward your loss until you've exhausted it) So yes, the government does in a way compensate you for your losses.
That only works if you have an income for that year. They aren't going to pay you back if you earn 0. They are only able to lower the tax due for the year, so if you have a job and your trading loses you money, you're fine, as long as the loss is greater than your wage. If it's not, the government couldn't care less. They will tell you to sell your property or take a loan
Well yes, but this is all assuming that you have some sort of stable job. For most people, getting involved in Crypto should be something that they do on the side and they shouldn't be dumping enough money to bankrupt them when their tax return comes around.
The people who got fucked were people who continues to buy and sell Bitcoin as it ran up in price, problem was that these people never took their gains. I'll give you an example of this:
Bob had bought $10000 in Bitcoin when Bitcoin was worth 1000, which means that Bob bought 10 bitcoins. When Bitcoin went to 10000 per coin he sold it all, great for Bob. Bob didn't even have to wait that long for the run up to happen, this all happened in the span of one year and Bob sold his Bitcoins in December right before the year ended so he could buy some Christmas presents. Right now, Bob has made $90,0000 in profit (disregarding transaction fees, etc). Due to Short term capital gains laws in the US, Bob has to pay 12 percent tax on this, which equals abut $10,800 for the US government. Not too bad for them, they made some good money.
But the problem is that Bob later bought 90,000 worth of Bitcoin at 20000 after the year ended. This means that Bob bought 4.5 Bitcoins, which he then sold when it went down to 3,000 in this situation Bob has now lost 76,500. He is now left with about $13,500
The problem presents itself when Bob notices how the taxable situation works. When it comes to calculating any sort of taxes, Dec 31 is the ending part of the year. That's when you should set aside 10,800 (from before when he made money) and say this is the money that will be used to pay taxes. Bob is left with 13,500 in USD and owes the US government $10,800 from last year.
Yes he can carry forward the loss that he has from before, but it won't affect his prior year return.
After paying his taxes, Bob is left with $13,500-$10,800= $2,700 from his gains. He's also left with $76,500 in losses that he'll be carrying forward on his return for 25.5 years (unless he offsets other gains with this money) Don't be Bob, set aside money for tax time and take sometime to understand the tax law.
If anyone has any questions about Crypto tax, I'm more then willing to explain things.
