Are Crypto Losses Tax Deductible?

Yes, cryptocurrency losses are tax deductible in the United States.

The IRS classifies cryptocurrency as property, meaning you can use crypto losses to offset capital gains. If your total losses exceed your total gains in a given tax year, you may deduct up to $3,000 from your ordinary income.

Any additional losses can be carried forward to future years, which can be used to offset any gains in the future.

However! This only applies to losses from trading. Any losses from hacks, scams or theft or are treated differently.

Keep reading to learn how to claim these losses on your tax return, what to do if you’ve been the victim of a scam, and how to stay compliant with IRS guidelines along the way.

How to Claim Crypto Losses on Taxes

1. Calculate Your Capital Losses

Determine Your Cost Basis

Your cost basis is the original purchase price of your cryptocurrency, including any fees associated with buying. If you bought Bitcoin for $10,000 plus a $50 transaction fee, your cost basis is $10,050.

Calculate Your Proceeds

Your proceeds are the amount you receive from selling, trading, or otherwise disposing of your cryptocurrency. For instance, if you sold your Bitcoin for $9,000, your proceeds are $9,000.

Calculate Your Loss

Subtract the proceeds from your cost basis to determine your capital loss.

The example above would look something like this:

Capital Loss = Cost Basis - Proceeds

         *\= $10,050 \- $9,000*

         *\= $1,050*

2. Report Your Crypto Losses on IRS Forms

Form 8949

Every cryptocurrency transaction resulting in a gain or loss should be listed on Form 8949. You will need:

• Date acquired
• Date sold or disposed of
• Proceeds (amount received)
• Cost basis
• Resulting gain or loss

Schedule D (Form 1040)

After listing transactions on Form 8949, transfer the totals to Schedule D (Form 1040). Schedule D summarizes all short-term (held for one year or less) and long-term (held for more than one year) capital gains and losses.

3. Offsetting Gains and Deducting Losses

Offset Capital Gains

Use your cryptocurrency losses to offset any capital gains from other investments, such as stocks or real estate.

• *Learn more about how to use crypto losses to offset gains from stocks

Deduct from Ordinary Income

If your total losses exceed your total gains, you may deduct up to $3,000 from your ordinary income. For married couples filing separately, this limit is generally $1,500 each.

Carry Forward Excess Losses

If your losses are more than $3,000 above your gains, you can carry forward the remaining amount to future tax years to offset gains or income later.

Handling Crypto Losses from Hacks, Scams, or Theft

In the crypto space, hacks, scams, or exchange collapses can lead to permanent losses for victims. If you have been the victim of any such crime, you should ensure that you report it to federal and state authorities, who may be able to assist.

What to Do If You Are a Victim

1. Gather Evidence: Collect any emails, transaction IDs, screenshots, or other communications related to the scam or theft. Detailed records are critical for both law enforcement and any subsequent tax filing you might attempt.
2. Contact Local Law Enforcement: File a police report in your jurisdiction. While local authorities may have limited crypto expertise, an official record helps establish a paper trail.
3. Report to Federal Authorities:
   • Federal Bureau of Investigation (FBI): You can file a report online via the Internet Crime Complaint Center (IC3) at ic3.gov or call 1-800-CALL-FBI (1-800-225-5324).
   • Federal Trade Commission (FTC): Report scams at reportfraud.ftc.gov or call 1-877-FTC-HELP (1-877-382-4357).
4. Consult a Professional: A specialized attorney or CPA familiar with crypto-related fraud can help you navigate potential tax implications.

How to Report It On Your Taxes

When it comes to your taxes, legislation is yet to catch up, which unfortunately means that your options are limited. Given the complexity involved, you may want to consult with an accountant or lawyer for further guidance.

While capital losses typically occur when you sell or dispose of an asset at a lower price than your cost basis, losses due to hacks, fraud, or theft fall into more complex categories. Here are a few general guidelines to be aware of:

1. Theft and Casualty Losses: Under current tax law, most personal theft or casualty losses are not deductible unless they result from a federally declared disaster.
2. Investment vs. Personal Losses: If crypto was held as an investment and you can document theft (e.g., through bankruptcy filings, police reports, or fraud statements), there may be limited ways to claim a theft loss. However, the process and criteria for claiming such losses can be very complex and often require professional tax advice.
3. Worthless Securities or Property: In some cases, if your cryptocurrency becomes worthless, you may be able to claim a capital loss. The IRS has specific requirements to prove worthlessness (for instance, you must show there’s no realistic prospect of recovery).

Below are two real-world case studies illustrating how such losses might be approached.

[Disclaimer: The following is hypothetical and does not provide specific guidance for any individual or situation. You must consult a professional attorney or CPA for personal guidance on how to handle these matters if you have been personally impacted.]

Case Study 1: Terra Luna Collapse

In 2022, Terra Luna suffered a dramatic collapse when its algorithmic stablecoin UST lost its peg, causing the Luna token’s value to plummet to nearly zero in a matter of days.

Tax Implications

1. Capital Loss if Sold:
   • If an investor sold Luna tokens for a fraction of the purchase price, they can typically claim a capital loss equal to the difference between the cost basis and the proceeds.
2. Holding Worthless Tokens:
   • If the tokens are still held and are effectively worthless, claiming a loss might be possible only if the tokens are considered permanently without value (no potential rebound or market). This often involves demonstrating that the token is no longer actively traded or has no realistic chance of recovery.
3. Documentation:
   • Investors should maintain transaction records, exchange statements, and any communication from Terra Luna or its affiliated projects to substantiate the loss.

For those who realized losses by selling or trading at near-zero prices, it may be possible for a capital loss to be reported on Form 8949 and Schedule D. If you are still holding near-worthless tokens, consult with a tax professional on whether you can claim them as worthless property under IRS rules.

Case Study 2: FTX Exchange Collapse

FTX, once a major cryptocurrency exchange, collapsed in late 2022 amid allegations of fraud and mismanagement, leaving users unable to withdraw their funds. Many investors had significant crypto balances locked on the platform.

Tax Implications

1. Proof of Loss:
   • If the funds are inaccessible or potentially stolen due to fraudulent activity, this could be treated as a theft loss. However, personal theft losses are generally not deductible unless tied to a federally declared disaster.
   • There may be arguments for an investment theft deduction if you can show evidence of fraud (e.g., through bankruptcy proceedings or court cases). This is legally complex and often requires professional guidance.
2. Recoveries and Bankruptcy:
   • In some bankruptcies, partial recoveries might eventually be distributed. If you claim a total loss now and later receive a portion of your funds, you’d need to adjust your tax returns or handle it in future returns.
3. Documentation:
   • Retain exchange statements, transaction IDs, and official communications from FTX. This evidence is crucial for any potential deduction or future adjustment.

FTX users face an uncertain path. Depending on ongoing bankruptcy proceedings and legal actions, you may or may not be able to claim theft losses. Consulting a tax attorney or CPA is often the best step to ensure compliance with IRS regulations.

Important Considerations When Claiming Crypto Losses On Your Taxes

Record-Keeping

Maintain detailed records of all cryptocurrency transactions, including:

• Dates of acquisition and disposal
• Purchase and sale prices
• Transaction fees
• Exchange or platform details

Good records help substantiate your tax return and protect you in case of an audit.

Theft and Casualty Losses

Generally, losses from theft or casualty (e.g., stolen crypto) are not deductible unless they result from a federally declared disaster. See IRS Publication 547 for more information.

IRS Guidance

The IRS treats cryptocurrency as property, which means all crypto transactions must be reported on your tax return, even if you did not realize a gain.

Final Thoughts

Cryptocurrency losses can indeed be tax-deductible, offering a way to minimize your overall tax liability. By properly calculating, reporting, and offsetting these losses, you can take full advantage of potential tax benefits while remaining compliant with IRS regulations. Always remember to maintain thorough records, consult official IRS publications, and seek professional guidance when in doubt.

Need help with calculating and reporting your crypto taxes?

Using specialised software like Crypto Tax Calculator or consulting with a tax professional can streamline the process and ensure accuracy. By taking the right steps, you’ll be well-prepared for tax season and positioned to optimize your financial outcomes.

Sources

• IRS Notice 2014-21 (Virtual Currency Guidance)
• IRS FAQ on Virtual Currency Transactions
• IRS Publication 550 (Investment Income and Expenses)
• IRS Publication 544 (Sales and Other Dispositions of Assets)
• IRS Publication 551 (Basis of Assets)