Are Crypto Losses Tax Deductible In The U.S.?

Crypto Losses and Your Taxes

The IRS treats cryptocurrencies as capital assets similar to real estate and securities. So, when you profit from them, you have to declare the proceeds as capital gains. However, you can declare a deductible capital loss if you dispose of them at a loss.

That said, you won't be able to deduct any losses if you're just holding your cryptocurrency since said loss (or gain) is only realized after disposing of the cryptocurrency by using it to buy something. Also, the value loss is determined by comparing the initial value of the crypto at the time of purchase with the market value when you dispose of the asset.

Depending on the length of time you handled the asset (less or more than a year), your losses or gains will also fall into one of two categories: short-term losses or gains taxed at rates of 10% to 37% and long-term losses or gains taxed at rates between 0% and 20%.

In rare circumstances, crypto holders can also claim an abandonment loss by discarding crypto assets that have been rendered useless, i.e., their market value plunged to zero, and they are no longer listed with any crypto trader or exchange.

How to Report Your Crypto Loss?

In essence, you report your crypto losses as you would report any other capital gains and losses, more or less. Let’s check out the exact steps in the procedure.

• Collect all 1099-B forms sent out by crypto exchanges for trades you completed in 2022 and check whether or not they reported the correct cost basis to the IRS;
  1. Separate the 1099-B forms that do not report the valid value.
• Compile the required data for crypto trades not reported on a 1099-B form:
  • Date of the crypto purchase,
  • The amount you paid in U.S. dollars,
  • Date of the crypto sale,
  • The amount you sold it for in U.S. dollars.
• Use IRS Form 8949 to detail the losses or gains of your crypto transactions:
  • For trades that generated a 1099-B form and reported the cost, check Box A (short-term) and Box E (long-term);
  • For trades that generated a 1099-B form but did not report the cost, check Box B (short-term) and Box D (long-term);
  • For trades that did not generate a 1099-B form, check Box C (short-term) and Box E (long-term).
• Use the calculations from Form 8949 to fill out Form 1040 Schedule D;
  • Short-term losses and gains are entered in Part I of Schedule D;
  • Long-term losses and gains are entered in Part II of Schedule D;
  • Separate sections have separate lines for the totals from Form 8949.
• Use Line 10 on IRS Form 4797 to claim an abandonment loss for any worthless cryptocurrencies you have discarded already. 

You can fill out the necessary forms by hand and mail them to the IRS or use handy tax software to complete them and file your taxes online quickly. If you need help with either procedure, you can always hire a tax preparer to assist you.

Can Crypto Losses Offset Capital Gains?

With cryptocurrency losses, you can offset your capital gains taxes for any asset, including stocks and real estate. Best of all, if your losses are greater than your gains, you can further lower your overall tax bill by reducing your taxable income.

However, note that you can only claim a total of $3,000 from your regular income tax per year. If your losses are above this threshold, you can roll over the extra amount into subsequent tax years using a technique called tax loss harvesting.

Moreover, since cryptocurrencies are not considered securities, they are not subject to ‘wash sale’ rules that block this tax break if you purchase a substantially identical asset within a month before or after the sale of the original asset.

Can You Claim Crypto Losses Without Selling Your Crypto?

As explained above, you can only claim a tax break on your crypto losses if you’ve already disposed of the assets by selling them. The IRS does not consider the value loss of the cryptocurrency that remained in your possession as a capital loss.

That said, an exception to the rule applies when your crypto assets lose all their value and have been removed from every public exchange platform. In such cases, you can apply for the abandonment loss clause as stipulated on IRS Form 4797. However, you have to discard your crypto before doing so by sending it to an invalid address.

Bottom Line

If you are one of those crypto investors whose assets plunged in value in 2022, there’s still a silver lining: you can leverage your losses to offset your gains and even trim up to $3,000 from your taxable income amount. Crypto holders with losses greater than this amount can even roll over the extra amount to subsequent tax years and reduce their future bills.