How To Claim Crypto Losses on Taxes for Deductions
Learn why you should claim your crypto losses taxes. You can claim cryptocurrency losses on your taxes to deduct from your income or to offset capital gains
Table of Contents
- Why it’s important to claim your cryptocurrency losses taxes
- Are crypto capital losses tax deductible?
- 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 taxes?
- I hold crypto at a loss but haven't sold it. Can I claim a loss on it?
- How to get started on filing taxes for your cryptocurrency losses
This article is part of TokenTax's Cryptocurrency Tax Guide.
If you invested in bitcoin or other cryptocurrencies and ended up with a loss, you still need to claim crypto on your taxes. In this guide, we’ll explain why it’s important to handle cryptocurrency taxes, even if you had only losses, as well as how to properly claim your crypto losses.
Crypto is a volatile market, so you may have losses. Claiming crypto losses on taxes is important — for two reasons:
- The IRS requires that you report all sales of crypto, since cryptocurrencies are treated as 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.
When filing your tax return, you have a few options if you have a loss. Your losses in crypto can offset other capital gains, or you can carry forward the losses to future years to offset gains in crypto or other capital gains.
You can also deduct up to $3,000 of your losses from your income. If you deduct $3,000 from your income but have more losses than that, then you can still carry forward the rest of the losses to deduct from future years or to offset future gains.
You can only deduct if you have total capital losses across all your assets. If you have crypto losses but enough capital gains with other capital assets to have an overall capital gain during the tax year, then you cannot deduct the losses, but your crypto losses will still offset capital gains in other assets.
To calculate your total losses:
- First, net your total long term gains and losses together
- Then, net your total short term gains and losses together
- Finally, net the long term gain/loss and short term gain/loss together to get your total capital gain or loss.
If you have a net loss in your cryptocurrency, you’d then add those losses to any gains you have in other capital assets, like stocks. If you have a net loss among all capital assets, then you can carry deduct from your income or carry forward capital losses.
Tax software for cryptocurrencies will automatically calculate your net loss, so you can use this loss to offset capital gains or deduct from your income.
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.
How taxes work for lost crypto depends on the situation. Do you still have ownership of the coins? If so, you need to sell the coins to be able to claim a capital loss.
If you lost crypto from a situation out of your control, like you lost crypto in an exchange that shut down or you had crypto stolen in a hack, then in past years some people had used IRS Form 4684 “Casualties and Thefts.”
However, as of the 2018 tax year, many kinds of losses were disallowed on the IRS 4684. You can now only deduct losses if they are the result of a federally declared disaster, which won’t often be the case for cryptocurrency situations.
Thus claiming theft loss on taxes for stolen crypto is very likely no longer possible.
Regardless of whether you can report lost coins on your taxes, it’s important that you enter in coins as lost or stolen on TokenTax.
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.
You can enter in such coins via manual entry with the lost or stolen transaction type. Also be sure to have the transaction where bought the coins, even if they were useless. That way, our algorithm knows you've traded away the crypto you originally spent to acquire these coins.
You report your crypto losses with the Form 8949 and 1040 Schedule D. If you're unsure how filing crypto taxes on your return works, be sure to check out our guide for filing crypto taxes first. In particularly, it's important to be familiar with the 1040 Schedule D, as that's the main tax form you use to handle capital losses.
Let’s say you’re filing bitcoin losses taxes. You’ve calculated your crypto taxes and come up with:
- A 1,000 long term gain
- A 5,000 short term loss
For simplicity, let’s assume crypto is the only capital asset you are doing taxes for. If you had other capital gains / losses in assets like stocks, then you’d merely add in those totals as well when summing your total gain / loss.
With a net $4,000 loss, you can use $3,000 of that loss to deduct from your income. Otherwise, you can carry forward those losses to future years — so if you have gains in the following tax year, you can subtract your carried forward losses. So if you decide to use $3,000 of the losses to deduct from your income, you can carry forward the remaining $1,000 of capital losses.
As we now know, certain 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.
Often, the IRS will have incomplete information on your crypto trading history. For example, if you bought bitcoin on Coinbase, transferred it to a separate foreign exchange, and made 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, they don’t have the information to know that you have an overall capital loss with crypto. By properly calculating your crypto taxes and reporting them with the IRS Form 8949 and Schedule D, then you will show that you do not have any capital gains that should be reported.
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 an unrealized loss and thus cannot be reported as a capital loss.
One use of Tax Loss Harvesting is to pinpoint unsold assets before the end of the tax year. For example, if you invested in many ICOs, you may be holding some coins still that you can sell off to claim the loss and lower your tax liability.
First things first, you’ll want to properly calculate your crypto taxes. TokenTax handles this automatically by importing all your trade data from exchanges. Then, it creates your Form 8949 tax form, to be included with your Schedule D.