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Crypto Taxes
Crypto Taxes

How to Report Crypto Losses and Reduce Your Tax Bill

Did you lose money on a crypto trade this year? You may have the opportunity to save thousands of dollars on your tax bill. 

In this guide, we’ll break down everything you need to know about cryptocurrency capital losses. We’ll clear up a few common misconceptions and outline how you can report capital losses on your tax return.

Can you write off crypto losses on taxes?

Yes. Cryptocurrencies such as bitcoin are treated as property by the IRS, and they are subject to capital gains and losses rules.

This means that when you realize losses after trading, selling, or otherwise disposing of your crypto, your losses offset your capital gains and up to $3000 of personal income. 

Any net losses exceeding $3000 can be rolled forward into future tax years. 

To better understand how this works, let’s explore a couple of examples. 

How crypto losses offset capital gains

Capital losses can also be used to offset an unlimited amount of your capital gains for the year. Let’s look at an example below.

Crypto losses tax example

In this case, Mitchell’s capital loss completely offsets his capital gains for the year. Because his capital loss exceeds his total capital gains, he can also deduct a portion of his income for the year. 

While this example may seem simple, Mitchell’s tax calculations would become more complicated if he had both short-term and long-term capital gains and losses for the year. 

Do capital losses offset short-term or long-term capital gains? 

In the United States, cryptocurrency is taxed at a lower rate when it is sold after a holding period of 12 months. 

Long term vs. Short term capital gains

It’s important to remember that short-term capital losses first offset short-term capital gains, and long-term capital losses first offset long-term capital gains. If you have any net capital losses remaining, it can then be used to offset capital gains of the other type.  

Short term capital gains offsetting long term

Can you claim a capital loss if you haven’t sold your crypto?

Remember, you need to actually realize your loss for it to count as a capital loss that can be written off on your taxes. To realize a loss, you must incur a taxable event—in other words, you need to actually dispose of your crypto to realize the loss.

Examples of disposals include the following: 

  • Trading or selling crypto for fiat currency (like USD) 
  • Trading one crypto for another cryptocurrency
  • Spending crypto to buy a good or service

That means that if you’re simply holding your cryptocurrency, you will not be able to deduct any losses. You will only be able to report your losses once a taxable event occurs. 

Unrealized losses explained 

If your cryptocurrency is worth less than when you received it and you haven’t sold it, it’s considered an unrealized loss. To better understand this concept, let’s look at an example. 

Unrealized capital loss example

In this case, Sara has an unrealized loss of $5,000 (20,000 - 15,000). Because she is still holding her assets, she cannot write this off at this time. 

Remember, Sara only realizes her loss in the asset when she disposes of it. 

What if I earned crypto income and the price went down? 

Cryptocurrency that is earned from mining, staking, and airdrops is taxed as personal income based on its fair market value at the time it was received. This holds true even if the fair market value of your cryptocurrency drops. 

If you continue to hold your crypto income, it will be considered an unrealized loss. However, if you decide to sell, you can claim a capital loss based on how much the value of your crypto income has fallen since you originally received it. 

Crypto income tax example

Do you have to report crypto losses to the IRS?

Yes, you need to report crypto losses on IRS Form 8949

Many investors believe that if they only incur losses and no gains, that they don’t actually have to report this to the IRS. This is not true, and the IRS makes it clear that cryptocurrency losses need to be reported on your tax return. 

To report your taxable events, calculate your gain or loss from the transaction and record this onto one line of Form 8949. Once you have filled out lines for each of your taxable events, sum them up and enter your total net gain or loss at the bottom of Form 8949 (pictured below).

Crypto Losses Form 8949

For a step-by-step walkthrough detailing how to report crypto on Form 8949, check out our blog post: How To Report Crypto On Taxes.

Can I write off lost or stolen cryptocurrency? 

Occasionally, investors may lose cryptocurrency due to events such as a hack or a lost wallet key. 

After the Tax Cuts and Jobs Act of 2017, these types of casualty and theft losses are no longer considered tax deductible. 

For more information, check out our guide to reporting lost or stolen cryptocurrency

Can I sell cryptocurrency at a loss and buy it back? 

Because of the advantages of reporting capital losses, some investors choose to intentionally sell their cryptocurrency at a loss to reduce their tax liability. This strategy is known as tax-loss harvesting

Tax-loss harvesting is a well-known strategy in the world of stocks and equities. However, cryptocurrency does have one major advantage over other asset classes when it comes to tax-loss harvesting: the lack of a wash sale rule. 

The wash sale rule currently applies to stocks and other securities. Capital losses cannot be claimed if a security is bought 30 days before or after a sale. At this time, this rule does not apply to virtual currencies. That means that crypto investors can sell their holdings, claim a capital loss, and buy back their assets shortly after. 

Crypto wash sale rule example

This may be changing in the near-future. The House Ways and Means Committee is considering expanding the wash sale rule so that it applies to cryptocurrency starting on December 31, 2021. 

Can I report NFT losses on my taxes? 

Have you sold an NFT that’s gone down in value? You can claim a capital loss based on the difference between its fair market value at the time you received it and its fair market value at the time of the sale. 

NFT loses on your taxes

For more information, check out our complete guide to NFT taxes

Why reporting capital losses is difficult

If you have been trading frequently, calculating your losses for each of your cryptocurrency trades and reporting them on your taxes can be quite tedious.

After all, crypto exchanges like Coinbase and Binance have trouble providing gains and losses reports to customers. This problem occurs due to the technical nature of cryptocurrencies and their interoperability. When a customer transfers crypto from one wallet to another, exchanges won’t necessarily know the customers original cost basis for the coin that was transferred in.  

Missing cost basis for crypto taxes

As a result, it’s very difficult for exchanges to accurately calculate capital gains and losses. That’s why investors are increasingly turning to crypto tax software to aggregate complete transaction history from all platforms. 

Report your capital losses with crypto tax software 

Instead of manually tracking each cryptocurrency trade on a spreadsheet, many crypto investors are leveraging crypto tax software like CryptoTrader.Tax to automate the entire reporting process.

By connecting your cryptocurrency exchanges and importing all of your historical trades, CryptoTrader.Tax can generate crypto tax reports with the click of a button.

You can use these reports to file your crypto losses with your tax return. You can even import the reports that CryptoTrader.Tax generates directly into your TurboTax or TaxAct account for easy filing.

In addition to your reports, CryptoTrader.Tax offers a full tax loss harvesting module that will help you identify which cryptocurrencies in your portfolio have the most significant unrealized losses and offer the largest tax savings potential.

Tax Loss Harvesting for Crypto

One trader saved over $10,000 on his tax bill by leveraging the CryptoTrader.Tax tax loss harvesting tool. You can learn more about how CryptoTrader.Tax works here.

Frequently asked questions 

Let’s cap things off by answering a few frequently asked questions about cryptocurrency capital losses. 

Can you write off crypto losses on your taxes? 

Yes. If you sell your cryptocurrency at a loss, you can offset your capital gains and $3000 of personal income for the year. 

How much taxes do you pay on crypto capital gains? 

Your cryptocurrency tax rate is dependent on several factors, such as your income and the length of time you held your cryptocurrency. 

Can crypto capital losses offset stock capital gains? 

Yes. Capital losses from cryptocurrency can be used to offset capital gains from stocks, cryptocurrency, and other asset classes subject to capital gains tax. 

How do I not pay taxes on crypto?

There is no legal way to avoid cryptocurrency taxes. However, strategies like tax loss harvesting can reduce your tax liability. 

Recently updated on
November 3, 2021
Category:
Crypto Taxes

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