Can You Write Off Crypto Losses On Your Taxes and How to Do It
The crypto market in late 2023 is still an undeniable behemoth, with more than $1.12 trillion in total market capitalization as of the time of the writing of this article. And while a great number of investors and enthusiasts have made fortunes in crypto, many others have also faced significant losses over the past few turbulent years.
If you unfortunately find yourself in the latter crowd, you might be wondering if there's a way to mitigate the financial losses come tax season, and we’re here to explain how.
Can You Write Off Crypto Losses on Taxes?
You can indeed write off your cryptocurrency losses on your taxes, as the IRS treats cryptos as property, akin to stocks or real estate. This classification means that crypto is subject to both capital gains and capital loss rules, allowing you to use the crypto losses to offset any capital gains, in addition with up to $3,000 of personal disposable income.
How to Calculate Crypto Losses
Calculating your crypto losses is simpler than you might think, especially if you’ve only traded on one exchange and with one digital wallet. The IRS requires you to determine the cost basis of your crypto assets, which is the original purchase price plus any associated transaction fees. Subtract this cost basis from the sale price to find your capital loss or gain.
Capital Loss/Gain= Sale Price−Cost Basis
Let’s say that in the past year, you bought $15,000 worth of Ethereum tokens, and sold them for $12,000. By following the formula, your capital loss would be $3,000.
If you’ve however traded and moved your crypto on more than one crypto exchange and wallet, you’ll need to be much more diligent in terms of tracking each trade and writing down your gains and losses to have a clear understanding of your trading record.
Writing Off Your Crypto Losses
Under U.S. tax law, the length of time you've held a cryptocurrency asset is crucial. If you’ve held on to your crypto asset for over 12 months, you will be subject to long-term capital gains tax, which can be as low as 0% or as high as 20%. Short-term holdings, on the other hand, are taxed as ordinary income, with rates between 10% and 37%.
Once you’ve determined which of your transactions fall into the long and short-term category, you'll report them on IRS Form 8949, as crypto exchange platforms currently do not issue 1099-B forms which are typically used for reporting the sale of stocks, bonds and other securities.
The 8949 form requires the following details for each transaction:
- Acquisition Date
- Disposition Date
- Cost Basis
After you’ve finished filling out the lines for your taxable events, you’ll calculate the total gain or loss and enter it at the bottom of the form.
After completing Form 8949, you'll transfer the totals to Schedule D. This form is where you'll net your short-term and long-term gains against each other. If you have any prior year capital losses, this is also where you'll include them. The final result will then flow to your Form 1040, which is your main tax return form.
If you're using crypto tax software, be aware that reporting crypto transactions may require a higher-tier service, which could incur additional fees.
- If you received a Form 1099-B from an exchange, verify whether the cost basis for the transactions was reported to the IRS. Keep these forms separate from those that didn't report the cost basis.
- For transactions that didn't generate a 1099-B, document the acquisition date, cost basis, disposition date, and the amount you sold it for in U.S. dollars.
- Use separate instances of Form 8949 for different types of trades based on whether they generated a 1099-B and whether the cost basis was reported to the IRS.
- If you're claiming a loss on a worthless, delisted cryptocurrency, you can report this using IRS Form 4797, Line 10.
Crypto and The Wash Sale Rule
Interestingly, the wash sale rule, applied to stocks and other securities, does not currently apply to cryptocurrencies, which are considered properties by the IRS since 2014.
This means you can sell your crypto at a loss and buy it back immediately, without waiting for the 30-day period required for stocks.
Do You Have to Report Crypto Losses to the IRS?
All of your crypto transactions must be reported to the IRS, whether they’ve resulted in gains or losses. If you only report on gains and not losses, you won’t be eligible for any potential tax benefits and you forfeit the opportunity to offset your gains.
Another prevalent myth is that you only need to report crypto transactions if you receive a 1099 form from your exchange. While some exchanges do issue 1099 forms, the majority do not, and not receiving the form from your exchange doesn’t mean that you are not obliged to report the transactions made at that exchange to the IRS.
Can You Claim a Capital Loss If You Haven't Sold Your Crypto?
The IRS will recognize a capital loss as “realized” only when you’ve either sold or otherwise disposed of the asset in question, meaning that you will not be able to claim a capital loss for tax purposes on a cryptocurrency you haven’t sold, even if it decreased in value.
This is consistent with the IRS's adherence to the realization principle, which mandates that income is not earned, and losses are not sustained, until an economic transaction has occurred that results in a measurable change in property rights.
Can I Report NFT Losses on My Taxes?
In the same manner as with digital currencies, NFTs (Non-Fungible Tokens) are also categorized as property assets by the IRS, making them subject to the same capital gains and loss rules that we listed above.
Navigating the tax implications of crypto investments can be complex, but a comprehensive understanding of how to strategically write off your crypto losses can yield substantial financial benefits in the long run.
Can I write off crypto loss on taxes?
You can write off crypto losses by reporting them on IRS Form 8949 and Schedule D.
Should I sell crypto at a loss?
Selling crypto at a loss can be a strategic move to offset other capital gains or reduce your taxable income.
Do you have to report crypto under $600?
All crypto transactions, regardless of size, must be reported to the IRS.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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