Can I write-off my crypto losses?

tokentax.co - How to Report Crypto Losses on Your Taxes - TokenTax

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Can I claim crypto losses on my taxes?

You can and should report crypto losses on your taxes. In this guide, we’ll show you how to reap tax benefits through realizing crypto losses for the 2022 tax year.

Can I write off crypto losses?

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. There are two ways in which 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, but you can still use these 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). Carryforward example In 2022, Jill had net gains of $4,000 and net losses of $30,000, for an overall capital loss of $26,000, which she reports on her income taxes. In 2023, she has more success in the market, and has an overall gain of $15,000. She can use $15,000 of her $26,000 of 2022 losses to completely offset her gains. In 2024, Jill has $20,000 of overall gains. She uses the remaining $11,000 of her 2022 losses to offset some of her gains, reducing her capital gains total to $9,000. Strategically selling assets at a loss in order to offset your gains is called crypto tax-loss harvesting. For more on this strategy, visit our Guide to Crypto Tax-Loss Harvesting. Please 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 permitted for securities. Because cryptocurrency is not considered a security, wash sales are technically permitted for crypto. However, politicians and regulators have indicated that the rule may be extended to crypto at some point. We recommend safer strategies to reduce your capital gains totals.

Can I report NFT losses on my taxes?

According to the IRS, any crypto-to-crypto transaction is a taxable event. For this reason, all of the following NFT activities are taxable capital gain/loss events for hobbyists:

Purchasing an NFT with cryptocurrency

Trading an NFT for another NFT

Selling or otherwise disposing of an NFT for a fungible cryptocurrency

For more guidance on reporting NFT losses on your taxes, see TokenTax’s NFT Tax Guide these six tips for NFT creators and investors.

Calculating crypto losses

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.

What are short- and long-term gains?

Short-term capital gains and losses come from the sale of property that you held for one year or less. These gains are typically taxed as ordinary income at a rate between 10% and 37% in 2022. Long-term capital gains and losses come from the sale of property that you held for more than one year and are typically taxed at preferential long-term capital gains rates of 0%, 15%, or 20% for 2022.

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Capital loss example You buy 5,000 UST for $5,000 on Coinbase, and pay a 1% transaction fee ($50). This makes your cost basis $5,050.

After the Terra Luna crash, you sell your 5,000 UST for $100.

$100 - $5,050 = -$4,950

You report a $4,950 loss on your taxes

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.

Forms to claim your crypto losses

There are certain forms that you should use to report crypto losses on your taxes - 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.

Please see our article “How to Report Crypto on Your Taxes: 5-Step Guide” for complete instructions on how to fill out Form 8949. 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.

Can you deduct stolen crypto on taxes?

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 theft losses. 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 TokenTax crypto tax software so it doesn't erroneously match up those tax lots with sales.

What happens if I don't report crypto losses?

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

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, you can 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.

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After ensuring that you meet the conditions for tax-loss harvesting, you may want to learn about the TokenTax plans that include access to our Tax Loss Harvesting Dashboard, which allows you to quickly and easily realize losses in order to reduce your tax liability.

For more info on crypto tax basics, visit our Crypto Tax Guide.

Challenges of reporting your crypto tax losses on your tax return

Calculating and reporting losses for each of your cryptocurrency trades in a tax year can be tedious and painstaking. It can also be troublesome to generate gains and losses reports when you have transferred crypto between wallets (such as Coinbase and Binance), because exchanges may not know the original cost basis of the transferred coin.

Report your capital losses with crypto tax software

TokenTax offers a solution to the various difficulties associated with reporting crypto tax losses. With our unique software, you can calculate capital gains totals using various crypto accounting methods (including FIFO, LIFO, HIFO, the average cost method, or TokenTax’s proprietary Minimization), allowing you to reduce your tax liability. It doesn’t matter where in the world you are - TokenTax will ensure that your tax return is compliant with your country’s regulations! If you would like to speak to our team about choosing a plan that is right for you, please contact us at [email protected].

To learn more about TokenTax or to sign up, visit: https://tokentax.co/pricing

Frequently Asked Questions

Do you pay taxes on crypto losses?

The short answer is no. If you have an asset that you hold at a loss, you need to realize the loss or sell the asset. If you have not sold the asset, it remains unrealized. When you realize a capital loss, that loss will be tracked, and it will add to your total capital losses. Your losses can be used to lower your capital gains through a process known as tax-loss harvesting.

Do you have to report crypto losses to the IRS?

Yes, the IRS requires that you report all sales of crypto, as it considers cryptocurrencies to be property.

How do I not pay taxes on crypto?

You generally do not owe taxes on cryptocurrency until you sell. That means that you can avoid paying taxes on crypto by not selling any virtual currency in a given tax year.

What tax percentage do you pay on crypto capital gains?

Short-term capital gains are typically taxed as ordinary income at a rate between 10% and 37% in 2022. Long-term capital gains are typically taxed at preferential long-term capital gains rates of 0%, 15%, or 20% for 2022.

tokentax.co - How to Report Crypto Losses on Your Taxes - TokenTax

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