How to Report Crypto Losses on Your Taxes
By reporting your crypto losses on your taxes, you can potentially lower your tax liability by claiming deductions or offsetting your income. Learn more.
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All disposals of cryptocurrency should be reported to the IRS, including those at a loss.
Reporting losses may allow you to deducting them from your income or offset capital gains.
Do I need to report crypto losses?
You can and should claim crypto losses on your taxes. Crypto is a volatile market, so you'll likely realize losses on some transactions. Claiming crypto losses on taxes is important for two primary reasons:
The IRS requires that you report all sales of crypto, as it considers cryptocurrencies property.
You can use crypto losses to offset capital losses (including future capital losses if applicable) and/or to deduct up to $3,000 from your income.
In this guide, we'll explore exactly what tax benefits crypto losses can provide.
Calculating crypto losses
To calculate your crypto losses:
Find the net total of your long-term gains and losses, including those on any non-crypto assets
Then, find the net total of your short-term gains and losses, including those on any non-crypto assets
Finally, find your overall capital gains or losses by calculating the net total of the long- term gain/loss and short-term gain/loss
Calculating these losses and deductions can be difficult if you have a large or complicated portfolio. However, crypto tax software can make this process significantly easier.
Can I write off crypto losses?
There are two ways reporting crypto losses can lower your taxes: one is through income tax deductions, the other is through offsetting capital gains.
Income tax deduction
If you experience total capital losses across all assets, you may deduct up to $3,000 of your losses from your income. You may not deduct losses from your income if you experienced total capital gains across all assets. However, you may still use your losses to offset capital gains in other assets.
Offsetting capital gains
Regardless of your assets' collective performance, virtual currency losses can be used to offset other capital gains, either from the current tax year or future tax years if carried forward.
Can I get a crypto scam tax deduction?
If you’ve been hacked or rug pulled, you’re probably wondering if you can get tax deductions for crypto scams.
Unfortunately, if you no longer retain ownership of the crypto, there is no clear method for claiming the loss.
In the past, some investors had used IRS Form 4686 "Casualties and Thefts" to do so. However, in 2018 the IRS clarified that the only losses allowed to be written off with Form 4686 were those lost as a result of a federally declared disaster, which is an unlikely scenario for most crypto casualty or theft losses.
Acknowledging lost coins in crypto tax software
Even though being able to write off lost or stolen off on your taxes is unlikely, it’s important that you record them in your crypto tax software. This is so that the algorithm doesn’t erroneously choose those tax lots to be sold in place of coins you actually still have under your control.
In TokenTax, you can categorize such coins via manual entry with the lost or stolen transaction type. Also be sure to enter the transaction details for when you bought the coins so that the algorithm recognizes that you disposed of the currency you used to purchase the lost or stolen coins.
How to report crypto losses on your taxes
You report your crypto losses with the Form 8949 and 1040 Schedule D.
Understanding the 1040 Schedule D is particularly important, as it is the main tax form used to report capital losses.
Let’s say you're filing bitcoin losses on your taxes. For simplicity, let’s assume crypto is your only capital asset. In the likely case that you have other capital gains or losses in non-crypto assets, these would need to be included in your calculations of your total gains or losses.
You’ve calculated your crypto taxes and come up with a $1,000 long-term gain and $5,000 short-term loss.
From your net $4,000 loss, you decide to deduct the maximum $3,000 from your income. You carry the additional $1,000 loss forward to future years to offset future capital gains.
What happens if I don't report crypto losses?
Crypto exchanges like Coinbase report information to the IRS, and crypto investors have received letters and notices from the IRS recommending individuals report their crypto taxes and/or pay more taxes.
Many of the leading exchanges send crypto 1099s to investors who have had more than $600 of rewards income, meaning that the IRS will also receive a report of each trader's activity. Additionally, even exchanges who do not send 1099s can be compelled to share information with the IRS through a John Doe summons, an investigative tool increasingly used by the Biden administration.
The information the IRS receives from these exchanges is often incomplete, however. For example, if you bought bitcoin on Coinbase, transferred it to a separate foreign crypto exchange, and incurred losses on that other exchange before sending bitcoin back to Coinbase to sell it for USD, then the IRS may only account for that BTC sale.
In this case, the agency doesn’t have the information to know that you have an overall capital loss with crypto. By accurately calculating your crypto taxes and reporting them to the IRS on Form 8949 and Schedule D, then you will show that you do not have any net capital gains that should be taxed.
I hold crypto at a loss but haven't sold it. Can I claim the loss?
In order to claim a loss, you will need to have made a crypto taxable event on the asset—this means selling it, trading it for another crypto, or spending it. Otherwise, the loss remains unrealized and thus cannot be reported as a capital loss.
With crypto tax loss harvesting, you can pinpoint unsold assets that are at a loss before the end of the tax year. For example, if you invested in many ICOs, you may be holding some coins that you can sell off to claim the loss and lower your tax liability.
For more info on crypto tax basics, visit our Crypto Tax Guide.
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