The IRS has issued guidance on how to claim losses from worthless and abandoned cryptocurrency investments on your tax returns. According to IRS Memo: 202302011, if an individual’s cryptocurrency has decreased significantly in value, they may be able to deduct the loss under IRC Section 165.
For example, John is an individual who purchased units of Cryptocurrency B in 2022 at $1.00 per unit for personal investment purposes on a cryptocurrency exchange.
However, the value of Cryptocurrency B decreased significantly, with each unit valued at less than one cent at the end of the year. Despite this, Cryptocurrency B was still traded on at least one exchange, and John retained control over the units, as evidenced by the ability to sell, exchange, or transfer them.
In this case, the IRS found that John did not take any action to abandon and permanently discard the units of Cryptocurrency B in 2022. Therefore, John did not sustain a loss under Section 165(a) due to abandonment.
This post will answer frequently asked questions regarding claiming these losses and how to ensure they are done correctly.
Can I deduct losses from my crypto on my tax return?
Yes, according to a recent Chief Counsel Advice from the IRS, individuals can deduct losses from cryptocurrency investments that have substantially declined in value under IRC Section 165 as an itemized expense disallowed by the Tax Cuts and Jobs Acts (TCJA).
What are the requirements for deducting a loss from my crypto?
The loss must be a result of a specific, identifiable event and must have occurred during the current tax year. The loss must also be the result of a completed transaction, such as the permanent sale, exchange or abandoning of the property.
Can I deduct losses from my cryptocurrency if the value has declined?
No, a decline in the value of property alone does not qualify for a tax deduction. The loss must be the result of a completed transaction.
How does the IRS determine if a cryptocurrency is worthless?
The IRS would consider whether the cryptocurrency is genuinely worth nothing, which is a question of fact. This determination would be based on the taxpayer’s subjective assessment of worthlessness and objective evidence that the cryptocurrency holds no value.
How is a loss from my crypto treated for tax purposes?
The IRS considers cryptocurrency as a capital asset. If a loss were sustained under IRC Section 165(a) due to the abandonment of a cryptocurrency, it would be treated as a capital loss. This means that the loss can only be used to offset capital gains and not other types of income.
Are there any limitations on the amount of losses I can deduct from my crypto?
Yes, Section 1211 of the IRC limits the number of capital losses taxpayers can deduct in a given tax year. There is an annual limitation of $3,000 for individual taxpayers ($1500 for married individuals filing separately).
Section 1212 allows taxpayers to carry forward any capital losses that exceed the limit set by Section 1211 and apply them to future tax years.
Taxpayers should keep accurate records of their cryptocurrency transactions to correctly report capital gains or losses on their tax returns.
What do I need to prove to claim a loss from my cryptocurrency as abandoned?
To claim a loss from abandonment, the taxpayer must have an intention to abandon the property and take an affirmative action.
Abandonment is proven through an evaluation of the surrounding facts and circumstances, which must show:
- an intention to abandon the property, coupled with
- an affirmative act of abandonment.
What is an affirmative act of abandonment?
An affirmative act is a specific action taken by the taxpayer to discard the property from use permanently.
Merely intending to abandon or not using the property is not enough to prove abandonment, and a clear demonstration of abandonment is required.
Maximize Your Tax Savings with Capital Losses
Taxpayers unsure how to claim a capital loss for their worthless or abandoned cryptocurrency should consult an experienced crypto tax lawyer.
This new guidance could provide much-needed financial relief for investors in the digital currency market affected by the volatility.
To learn more about crypto capital gains and losses, check out our Complete Crypto Tax Guide