The world of crypto can be a wild ride for investors, with fortunes made and lost overnight. If you suffered from bad investments, you’re probably wondering how to report crypto losses on your taxes. You might be wondering whether you need to report at all.
Well, look no further because our highly experienced crypto tax attorneys have your answers! Here are 5 essential things every crypto investor should know about crypto losses and taxes.
1. Crypto losses can offset capital gains and other taxable income.
What does that mean for me?
When you sell cryptocurrency for less than you initially paid, you have a capital loss. Good news–losses can be used to offset capital gains from crypto, as well as other investments. For instance, if you made a $5,000 profit selling stocks but lost $2,000 in crypto, you only have to pay taxes on the $3,000 net gain.
Furthermore, if your crypto losses exceed your total capital gains, you can use the loss to offset up to $3,000 of other taxable income. If your losses are even greater than that, you can carry the remainder forward to future tax years.
2. You need to report crypto on your taxes even if you lost money.
Why is that?
Regardless of downturns in your crypto portfolio, you must report all transactions to the IRS. The tax forms issued by cryptocurrency exchanges can make it look like you made a profit even if you actually lost money—so if you don’t report crypto losses, the IRS has a great reason to come knocking at your door and begin a crypto tax audit.
And remember: reporting losses can lower your tax bill, so it’s in your best interest to report!
3. Tax-loss harvesting is a powerful tool to lower your bill.
I like saving money. How can I do that?
Crypto tax-loss harvesting involves strategically selling off investments at a loss to offset capital gains and reduce your overall taxable income. This tactic can be used for cryptocurrencies and even NFTs! Just be sure to consult with a tax professional to make sure you understand all the implications, and that you’re selling the right assets to achieve a lower tax bill.
4. You can’t always claim a loss for theft, scams, or bankruptcy.
Sometimes, crypto investments can go south not because of market fluctuations, but because of theft, fraud, or bankruptcy of a platform. Remember when FTX declared bankruptcy in 2022, quickly followed by Celsius and BlockFi?
In many cases, claiming these losses becomes complex.
Can you write off FTX losses or losses from another bankrupt exchange? Probably not any time soon. This is because claimants could receive money back once bankruptcy proceedings are complete. For this reason, the IRS may not agree that you have a loss at all. Bankruptcy cases can drag on for years, so you may not find a quick resolution.
The FTX bankruptcy is a somewhat special case because of the fraud charges involved, but it’s unclear whether the IRS will issue specific guidance regarding this situation.
If you have any questions about your losses resulting from bankruptcy, reach out to a tax professional for guidance.
Theft, Scams, and Phishing Attacks
Victims of cryptocurrency scams or investors who were hacked typically can’t write off these losses due to changes under the Tax Cuts and Jobs Act (TCJA). Previously, individuals might have claimed a personal casualty loss, but the TCJA now disallows this (unless the loss is related to a federally declared disaster).
If you have any questions, be sure to consult with a knowledgeable team, like Gordon Law Group, to navigate these murky waters.
5. Crypto tax software may not recognize your losses.
Wait, why not?
While crypto tax software can be a lifesaver, it isn’t foolproof. It might not always recognize every transaction, especially if your activity is spread across multiple platforms or wallets. Learn more about the most common problems with crypto tax software.
How to report crypto losses on taxes
You’ve faced the losses, and now it’s time to report them. Follow these steps for reporting crypto losses on your taxes:
- Gather Transaction Records: Start by collecting all records of your crypto transactions. This includes buying, selling, mining, and any other crypto-related activity.
- Calculate Gains and Losses: Calculate the difference between your purchase price and selling price for each taxable transaction. This will help you determine your net gains or losses.
- Complete Form 8949 and Schedule D: Record each transaction, along with its capital gain or loss, on Form 8949. Then, record the totals from Form 8949 to Schedule D.
- Consider Professional Assistance: If you find the process overwhelming or simply want to ensure everything is accurate, consider hiring a professional. Gordon Law Group has prepared more than 1,200 crypto tax reports. We’re here to make the process seamless and stress-free!
Remember, staying organized and maintaining meticulous records is key to accurately reporting cryptocurrency on your taxes. See our guide How to Report Cryptocurrency on Your Taxes for more information.