How To Write Off Crypto Losses On Your Taxes – Forbes Advisor

Over the past 15 years, Bitcoin and other cryptocurrencies have soared in value beyond Satoshi Nakamoto’s wildest dreams.

Even after factoring in the crypto winter downturn of 2022-2023, these impressive profits have created a whole class of crypto billionaires.

Thankfully, cryptocurrency losses are tax deductible like any other type of investment loss. This means that losses can be used to offset the capital gains tax owed on more successful investment activities.

Tax implications of cryptocurrency losses

Capital assets such as stocks, mutual funds, and cryptocurrencies are not subject to IRS tax when purchased and held in a portfolio. You only have to pay taxes if you sell your property for more than you bought it for.

The IRS may classify a sale as long-term if the asset has been held for one year or longer, regardless of whether it is a gain or a loss. Favorable tax rates apply to long-term capital gains. If he has held the property for less than one year, it is considered short-term and he will pay the normal income tax rate. If you sell cryptocurrency and make a loss, the IRS allows you to offset the loss against other income on your tax returns.

These so-called “realized losses” can be used to offset other taxable investment gains. When you hear the word ‘realized’, it usually means that an asset has been sold. However, with cryptocurrencies, a gain or loss is “realized” each time you dispose of your crypto, including when using it to make a purchase or exchanging one crypto for another.

Suppose you buy a Tesla car for $80,000 with Dogecoin. If DOGE he bought a few years ago for $40,000 and then its value rises to $80,000 and he spends it on Tesla, the IRS will mark his $40,000 “realized gain” as a long-term capital gain. Tax (on top of this). state or local sales tax).

How cryptocurrency losses are calculated

Calculating cryptocurrency profit and loss should be easy. It’s just the price difference between what you paid for the coin and what you sold it for.

Unfortunately, cryptocurrency exchanges are not required to track this information. The best cryptocurrency exchanges track cryptocurrency buy and sell prices, but crypto investors themselves are responsible for recording this information.

There is a crypto tax program that allows you to upload how much you bought a specific coin on a specific date. These programs enter relevant pricing data.Many can also generate copies IRS Form 8949“Sales and Other Disposals of Capital Assets” to file with annual tax returns to aggregate capital gains and losses.

Alternatively, check out our cryptocurrency tax calculator to see how much capital gains tax you owe on your cryptocurrency gains.

Wash sale rules and cryptocurrencies

Cryptocurrencies have special advantages over stocks and other traditional assets when sold at a loss. In 2014, the IRS said that for tax purposes, cryptocurrencies should be treated as assets rather than capital assets like stocks.

This is important because while capital assets are subject to the wash sale rule, real estate is not.

The wash sale rule prohibits an investor from selling a capital asset at a loss and then immediately repurchasing the same or substantially similar asset within 30 days of the sale to enjoy tax benefits. Cryptocurrencies are not considered capital assets and are therefore not subject to the regulation.

This means that if your losses are accumulating but you want to hold onto your cryptocurrency for the long term, you can sell your coin on the day it falls and buy it back immediately upon recognizing your tax loss.

Long-term and short-term capital gains and losses

Another important factor for reporting cryptocurrency gains and losses is how long you have held the cryptocurrency.

Capital gains and losses are divided into two groups: short term and long term. Short-term capital gains or losses are assets held for less than one year. Long-term capital gains or losses are assets held for more than one year.

Long-term capital gains are taxed at a lower rate than short-term gains.

Gains and losses offset each other, and this happens in several steps. First, short-term losses offset short-term gains. Long-term losses then offset long-term gains. Short-term losses can offset long-term gains and vice versa if losses remain.

Capital loss carry forward

If you still have a loss after taking these steps, you can deduct the loss from your regular income. This deduction is limited to $3,000 each year, and if married, he is limited to $1,500 if filing separately.

Losses over $3,000 are divided into short term and long term and carried forward to the next tax year. These losses are offset against the next year’s profits until they are exhausted.

How to report cryptocurrency losses in taxes

Reporting cryptocurrency gains and losses to taxes is a multi-step process. After you have transaction data, including cost bases and revenue, do the following:

Step 1: Short-term and long-term breakouts

When reporting tax gains and losses, you should separate your transactions into short-term and long-term transactions. From there, group transactions based on whether they were reported in 1099-B. No cryptocurrency exchanges are currently issuing 1099-B. Therefore, you should select the option that indicates this.

Step 2: Reporting on Form 8949

As transactions fall into these groups, they are reported on Form 8949. Each transaction requires the following information:

• Description (usually quantity and coin, such as “0.012 BTC”)
• Date of acquisition
• disposal date
• Revenue (selling price)
• cost basis

The last column calculates profit or loss by subtracting cost basis from revenue. All transactions are totaled at the bottom of each 8949.

Step 3: Schedule D and Form 1040

The totals from each 8949 are then collected on Schedule D. Here short-term and long-term profits cancel each other out. This includes past capital losses and is also where you determine if there are capital loss carryforwards to the next tax year. The final result, whether profit or loss, is sent to Form 1040.

cancel worthless crypto

Did the coins you bought this year go bankrupt? If you still have even a little bit of value left in your coins, you can sell your holdings and report your tax loss. But if your coin is completely zeroed out and no longer traded on any exchange, you’re out of luck.

That’s when a cryptocurrency is declared worthless in the eyes of the IRS.

Capital assets such as shares are generally deductible in the tax year in which they are declared worthless. However, as we learned earlier, cryptocurrencies are considered property, not capital assets.

This means that if a cryptocurrency is declared worthless, it is treated differently than a normal investment loss. Instead, they are treated as various itemized deductions. Other itemized deductions are no longer allowed after the Tax Cuts and Jobs Act was passed in 2017.

However, this law is scheduled to be repealed at the end of 2025, so this tax treatment may change in the future.

Other IRS reporting requirements for cryptocurrencies

To crack down on unreported cryptocurrency transactions, the IRS has added digital asset questions to Form 1040. This question asks you to disclose whether you received or disposed of digital assets during the year.

Cryptocurrencies received as payment for services are taxed as income. Cryptocurrencies gifted to other individuals may need to be reported on gift tax returns depending on their value. In 2023, gifts under $17,000 will be exempt from gift tax reporting.

It’s better to sell when cryptocurrencies are going up, but these tax incentives make selling at a loss a little less painful. If you still need tax help sorting out your cryptocurrency losses, contact a tax representative who specializes in cryptocurrencies. IRS guidance and regulations have been updated frequently over the last few years and may continue to evolve.