Can I Claim Crypto Losses on Taxes: Your Comprehensive Guide
The rollercoaster ride in the crypto market has resulted in sizable profits for many investors and significant losses for others.
High-profile platform collapses have compounded these losses, leaving many asking, "Can I claim crypto losses on taxes?"
This article explains how cryptocurrency losses can be claimed on tax returns and provides guidance for specific situations.
As with anything like this, make sure you speak to a financial expert, as laws change depending on where you’re based. This is a general overview, but these should be taken as a general rule of thumb, not legal advice.
Claiming Crypto Losses on Taxes
Firstly, cryptocurrency losses can offset investment gains on your tax returns. Essentially, if you've sold your cryptocurrency for less than you paid, the "capital loss" you have suffered can be used to reduce your taxable income.
The IRS treats cryptocurrencies as property. Therefore, the same rules apply as if you were dealing in real estate or stocks 1. If your crypto losses exceed your gains, you can deduct the difference from your regular income, up to a limit of $3,000 2.
To calculate your loss, subtract the sale price of your cryptocurrency from the original purchase price, also known as the 'basis' 3.
The excess is a carryover loss if your crypto losses exceed your other investment gains and $3,000 of regular income. This can be used to offset gains in subsequent tax years 4.
Calculating Capital Losses
Calculating capital losses for cryptocurrency follows the same principle as for traditional investments. It involves subtracting the cost basis (what you paid for the asset, including fees and other expenses) from the sale price. Let's illustrate this with an example.
Suppose you purchased 1 Bitcoin in June 2022 for $40,000. In November 2023, the price of Bitcoin drops due to market volatility, and you decide to sell your Bitcoin for $30,000.
The calculation of your capital loss would be:
Cost Basis (Original Purchase Price) - Sale Price = Capital Loss
$40,000 - $30,000 = $10,000
In this example, you've incurred a capital loss of $10,000 on your Bitcoin investment. This loss can offset any capital gains you've made in the same year.
If your losses exceed your gains, you can use the remaining amount to offset up to $3,000 of other income. If there's still an excess, it can be carried forward to future years.
Remember, this is a simplified example. Cryptocurrency taxes can be complex, particularly when you have numerous transactions across different platforms.
It's always a good idea to consult with a tax professional familiar with cryptocurrency.
Cost-Basis Basics
When you have multiple units of an asset and decide to sell some but not all, there are different methods for determining which assets were sold.
This affects the cost basis and, therefore, the capital gains tax. For cryptocurrencies, the most commonly used methods are First-In-First-Out (FIFO), Last-In-First-Out (LIFO), and Highest-In-First-Out (HIFO).
First-In-First-Out (FIFO): With this method, it's assumed that the first units you bought (the oldest ones) are the ones you sell first. This can be beneficial if the cryptocurrency's price has been rising overall since you started investing, as it would result in lower taxable gains due to inflation over time.
Last-In-First-Out (LIFO): This method assumes that the most recently purchased units (the newest ones) are sold first. If the value of the cryptocurrency has been falling, this could lead to lower capital gains or higher capital losses, reducing your tax liability.
Highest-In-First-Out (HIFO): This method involves selling the units you bought at the highest price. This approach could minimize your tax liability as it results in the highest cost basis and, therefore the lowest capital gains.
Navigating Specific Situations
If you've suffered losses due to the bankruptcy of a crypto platform, consider filing an extension on your tax return. The legalities and technicalities around crypto platform bankruptcies can be complex, and waiting for further clarity may be beneficial 5.
Losses due to theft are another thorny issue. The IRS allows these losses to be written off, but strict requirements must be met 6. This often involves proving the theft occurred, legal action, and other steps.
One potential benefit for crypto traders is the absence of a 'wash sale rule'.
Traditional stock traders are barred from claiming a loss on a security if they buy a "substantially identical" one within 30 days before or after the sale 7. This rule does not apply to cryptocurrencies, but it's worth noting that this could change.
Reporting Crypto Activity
All crypto activity should be reported to the IRS (If you’re based in the US), even if you haven't received a Form 1099-B 8.
Ignoring to do so can lead to penalties and interest on any amount you owe.
If you’re unsure how to do this, we highly recommend checking out tools like Koinly, which can automate this for you for a small fee.
Seeking Professional Help
If this all seems overwhelming, remember there is professional help available.
CPAs and tax professionals specializing in cryptocurrency can ensure you correctly handle your crypto tax situation 9.
If you’re unsure or cannot afford financial advice, we recommend contacting your bank, which may be able to refer you to someone or speak to the FPA (Financial Planning Association).
Conclusion
Understanding your tax obligations and opportunities is vital in the volatile world of cryptocurrency.
Claiming crypto losses on taxes is possible and may significantly impact your overall tax situation.
Whether you're dealing with bankruptcies, theft, or simply trading, remember the importance of properly handling and reporting your crypto transactions.
Citations
IRS, 2022. "Frequently Asked Questions on Virtual Currency Transactions." https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
TurboTax, 2023. "Can I Deduct Cryptocurrency Losses?" https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/can-i-deduct-bitcoin-losses/
Investopedia, 2023. "How To Calculate Your Crypto Tax." https://www.investopedia.com/tech/how-calculate-your-crypto-taxes/
TurboTax, 2023. "What are Capital Loss Carryovers?" https://turbotax.intuit.com/tax-tips/investments-and-taxes/capital-gains-and-losses/
Forbes, 2023. "What Happens If My Cryptocurrency Exchange Goes Under?" https://www.forbes.com/sites/ktorpey/2019/05/26/if-your-bitcoin-exchange-goes-bankrupt-dont-expect-to-get-your-money-back/
IRS, 2022. "Topic No. 515 Casualty, Disaster, and Theft Losses" https://www.irs.gov/taxtopics/tc515
Investopedia, 2023. "Wash-Sale Rule Definition." https://www.investopedia.com/terms/w/washsalerule.asp
IRS, 2022. "Virtual Currencies." https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies
CoinTracker, 2023. "The Ultimate Guide to Cryptocurrency Taxes." https://www.cointracker.io/blog/the-ultimate-cryptocurrency-tax-guide