How to Report Crypto Losses on Your Taxes

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:

1. The IRS requires that you report all sales of crypto, as it considers cryptocurrencies property.

2. 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.

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.

Strategically selling assets at a loss in order to offset your gains is called crypto tax loss harvesting. For more on this practice, visit our Guide to Crypto Tax Loss Harvesting.

Be aware that selling an asset and rebuying it within 30 days is considered a crypto wash sale. In the U.S., wash sales are not allowed for securities. Because cryptocurrency is not considered a security, technically wash sales are permitted for crypto. However, politicians and regulators have indicated they would like to extend the rule to crypto. You may want to consider safer ways to reduce your capital gains totals.

To calculate your crypto capital loss, you use the same formula you would for calculating crypto gains: Proceeds - cost basis = capital loss. Proceeds are the total sum you received upon disposing of the asset, while cost basis is the total sum for which you acquired the asset, including any transaction or gas fees. The result of your calculation will be negative if you've experienced a loss.

After calculating and reporting individual transactions, you also need to find your net losses and gains so you can determine if you have overall losses or gains. If you have overall losses, you can carry forward losses to future tax years.

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.

You report your crypto losses with the Form 8949 and 1040 Schedule D.

Each sale of crypto during the tax year is reported on the 8949. If you had non-crypto investments, they need to be reported on separate Form 8949s when you file your taxes.

The example below shows a completed crypto Form 8949, including a loss.

For a complete walkthrough of how to fill out Form 8949, check out these instructions.

Your overall long-term and short-term gains and losses totals are reported on Form 1040 Schedule D. This is where you can also include losses carried forward from past years.

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 2018 the IRS clarified that the only losses allowed to be written off with Form 4686 (Casualties and Thefts) were those assets lost as a result of a federally declared disaster.

Even though you can't get a deduction for stolen crypto, it’s important that you record the theft in your crypto tax software so it doesn't erroneously match up those tax lots with sales.

Crypto exchanges like Coinbase report information to the IRS, and crypto investors have received IRS letters 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.

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.