Have you lost money this year trading cryptocurrencies? On your tax bill, you could be able to save thousands of dollars.
We’ll explain everything you need to know about capital losses on cryptocurrencies in this guide. We’ll dispel some widespread myths and explain how to record capital losses on your tax return.
Can cryptocurrency losses be deducted from taxes
Yes. The IRS treats cryptocurrencies like bitcoin as property, making capital gains and loss regulations applicable to them.
This implies that your losses will offset your capital gains and up to $3,000 in personal income when you realize losses after trading, selling, or otherwise disposing of your cryptocurrency.
Any net losses that are more than $3,000 may be carried over to upcoming tax years.
Do short-term or long-term capital gains outweigh capital losses
When bitcoin is sold in the US after a year of holding it, the tax on the sale is lower.
It’s crucial to keep in mind that long-term capital losses offset long-term capital gains before either short-term or long-term capital losses. The remaining net capital losses can then be applied to the other sort of capital profits if any.
When you don’t sell your cryptocurrency, can you still claim a capital loss
Keep in mind that in order for a loss to qualify as a capital loss for tax purposes, you must actually realize the loss. You must have a taxable event in order to realize a loss, which means you must actually sell of your cryptocurrency.
Disposals include the following, as examples:
Trading or converting cryptocurrency into fiat money (like USD)
trading one coin for another
using cryptocurrency to pay for a product or service
This implies that you won’t be able to write off any losses if you’re just holding your cryptocurrency. Only after a taxable event takes place will you be able to declare your losses.
What if I received cryptocurrency revenue but the price fell
The taxation of cryptocurrency acquired through mining, staking, and airdrops is based on the currency’s fair market value at the time the earnings were made. This stays true even if your cryptocurrency’s fair market value decreases.
Your cryptocurrency income will be regarded as an unrealized loss if you keep holding it. However, if you want to sell, you can deduct a capital loss based on how much your cryptocurrency income has decreased in value since you first received it.
The IRS Form 8949 requires you to report any cryptocurrency losses.
Many investors think they don’t need to report anything to the IRS if they solely experience losses rather than gains. This is untrue, and the IRS is clear that any losses on bitcoin transactions must be disclosed on your tax return.
Calculate your gain or loss from the transaction and enter this information on one line of Form 8949 to report your taxable events. Once the lines for all of your taxable events have been filled out, add them all up and enter your overall net gain (or loss) at the bottom of Form 8949.
Can I deduct cryptocurrency that has been lost or stolen
Investors may occasionally lose cryptocurrency as a result of occurrences like a hack or a misplaced wallet key.
These types of casualty and theft losses are no longer regarded as tax deductible due to the Tax Cuts and Jobs Act of 2017.
Visit our guide to filing a lost or stolen cryptocurrency report for more details.