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.
Table of Contents
- Why it’s important to claim your cryptocurrency losses taxes
- Can I write off crypto losses on my taxes?
- How do I calculate my crypto losses for taxes?
- Crypto casualty and theft losses
- How do I file cryptocurrency losses on my tax return?
- What happens if I don’t file crypto losses on my taxes?
- I hold crypto at a loss but haven't sold it. Can I claim a loss on it?
- Related Content
This article is part of TokenTax's Cryptocurrency Tax Guide.
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 either offset capital losses (including future capital losses if applicable) or to deduct up to $3k from your income.
In this guide, we'll explore exactly what tax benefits crypto losses can provide.
Yes, there are two primary ways to lower your tax liability by reporting crypto losses.
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.
Regardless of your assets' collective performance, crypto losses can be used to offset other capital gains, either from the current tax year or future tax years if carried forward.
To calculate your total losses:
- First, 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
If you have a net loss among all capital assets, then you can deduct up to $3,000 of those losses and carry forward additional losses to offset future capital gains.
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.
If you’ve lost crypto due to a wallet hack, a crypto scam, or an unexpected exchange shutdown, you’re probably wondering if you have any recourse for tax write-offs or deductions.
Unfortunately, if you no longer retain ownership of the crypto, there is no clear method for writing off the loss.
In the past, some investors had used IRS Form 4686 "Casualities 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.
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.
Undertanding 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 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.
Crypto exchanges report information to the IRS, and crypto investors have received letters and notices from the IRS recommending crypto tax filing and even requests for more taxes paid.
Many of the leading crypto exchanges send Forms 1099 to investors who have had more than $600 of trades, 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 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 properly 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 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 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.
- Understanding Form 8949
- The Complete Guide to Crypto Tax Loss Harvesting
- [What To Do If You Receive a Form 1099 for Crypto](https://tokentax.co/help/what-it-means-if-you-got-a-1099-k-for-crypto-taxes/