When you invest in any asset, you run the risk of loss. While it can be frustrating to lose money on an investment, the government also provides you with a way to use it to offset some of the pain.
Because the IRS views cryptocurrency as property, you can report crypto losses on your taxes — and even use them to offset gains elsewhere. You can even reduce your taxable income with the help of crypto losses.
Let’s take a look at how crypto losses work and how to report crypto losses on your taxes.
What Are Considered Crypto Losses?
As you might expect, crypto losses are those that come when you lose money on your crypto investments. You might see losses when you buy cryptocurrencies or non-fungible tokens (NFTs). When you sell your digital assets for less than you bought them for, you realize losses.
What is a Taxable Event?
In order to claim crypto losses, you need to have a taxable event related to your crypto assets. When you sell a crypto asset bought earlier, it’s a taxable event. Additionally, you must report that as income if you were paid in crypto. However, when you sell a cryptocurrency coin, it’s a taxable event, and you have to base the gain or loss on the coin's market value when you received it.
Realize, too, that converting one cryptocurrency to another is considered a taxable event. So, if you trade BTC for ETH, you must log it as a taxable event. You figure your gain or loss based on BTC's value at the transaction's time. Then, you have to determine the cost basis of the ETH you just bought. Down the road, selling the ETH or converting it to another cryptocurrency will be another taxable event.
Anytime you receive, sell or convert a crypto asset, it’s a separate taxable event. If your crypto portfolio is down, you can’t claim the loss. Instead, you can only claim the loss after you “lock it in” by selling or trading the asset for something else.
How to Calculate Crypto Losses
Calculating crypto losses is fairly straightforward. You figure them out similarly to how you would determine other asset losses. You simply subtract your cost basis from your proceeds.
For example, let’s say you bought a single Bitcoin (BTC) for $42,000 earlier this year. Now, you sell it for $20,700. Your loss is $20,700 - $42,000 = -$21,300.
You now have a $21,300 loss that you can use to offset gains elsewhere or to reduce your taxable income.
Anytime you have a crypto loss, you need to list out the individual transaction and figure out the loss from each. This applies to NFTs as well. If you bought an NFT for $5,000 and sold it for $3,000, you have a loss of $2,000. That brings your total losses to $23,300 when combined with your cryptocurrency loss.
Pay attention to your different losses, and make sure to keep track of your transactions.
How to Use Crypto Losses
After calculating your crypto losses, you can then use them to reduce your overall tax bill. Here are the ways you can use crypto losses:
Offset crypto gains: If you had other gains, you can offset some of them. For example, if you took $6,000 profits on a memecoin, your losses can offset those profits. So, you don’t have to pay capital gains taxes on those profits — and you still have $17,300 of “room” left with your capital gains.
Offset other capital gains: You can also use your crypto losses to offset other capital gains. If you had capital gains from stock sales, those can be offset, allowing you to avoid paying capital gains on those assets. If you had $10,000 in gains from a stock sale, you still have $7,300 left to use as part of your tax reduction strategy.
Reduce your taxable income: Once you’ve offset your capital gains, you’re eligible to reduce your income by up to $3,000. In this case, you can reduce your income by that much and still have $4,300 in crypto losses left to use some other time.
Carry forward: Finally, it’s possible to carry your capital losses forward indefinitely. In this example, you still have $4,300. You can use that next year to offset capital gains or reduce your taxable income, depending on how your strategy plays out.
Using them to reduce your tax bill can be a good move forward if you’re trying to figure out how to make the most of your crypto losses. After all, if you’re unsure about some crypto assets and want to move into something else, selling now and harvesting the losses can be one way to better manage your finances.
How To Report Your Crypto Losses
Once you’ve established that you have crypto losses, it’s time to report them on your taxes. Your first step is to fill out a Form 8949. This will enumerate all of your crypto sales throughout the year. You’ll list all of your transactions and indicate whether they are gains or losses.
It’s important to note that crypto assets must be kept separate from other assets. So, if you have stocks or other assets to report, you should do so on a different Form 8949.
After that’s done, you need to fill out your Schedule D. This is where you list out your totals. You can also use this Schedule to list the losses that you’re carrying forward.
Then, you can figure out whether you have a net capital gain or loss. If there’s a net loss, you can then use that to offset your income and/or carry forward the loss.
Can You Claim Stolen Crypto as a Loss?
When filling out your forms, you might wonder if you can claim stolen crypto as a loss on your taxes. Unfortunately, the current guidance doesn’t allow stolen property to be claimed as a loss on your taxes. The only exception is if you lost assets due to a federally-declared disaster. For most people, crypto assets won’t be included in that designation.
If you do have crypto stolen, you want to make a note of it so that it isn’t included later on in the calculation of gains.
Finding Your Crypto Gain and Loss Information
Managing your crypto information can be challenging, however. Some of the major cryptocurrency exchanges report to the IRS, so it’s a good idea to keep track of your transactions so you can report them.
Depending on the exchange, you might have access to your transaction history, making it easier to determine your cost basis and other information. You can also keep a spreadsheet and track the information each time you complete a transaction.
With crypto becoming an increasingly popular asset class, software solutions can help you keep track of your taxable events. Crypto tax software can help you manage transactions and fill in tax forms more accurately. By keeping good records, you’re more likely to be able to show your losses — and use them to reduce your overall tax bill.
The IRS expects you to report your crypto asset gains and the income you make from these assets. Depending on the situation, an exchange or another authority might report to the IRS. As a result, it makes sense to keep good records of your crypto losses. That way, you can use the losses to offset some of your gains. You can also use the losses to reduce your income if there are enough of them.
With crypto down so much this year now might be a good time to re-evaluate your digital asset portfolio. Figure out which cryptocurrencies and other assets no longer serve you. Then, sell and collect the losses. You can use those losses as part of your strategy to reduce your tax liability and re-position yourself to take advantage of gains when the market recovers.
Miranda Marquit, MBA, has been covering personal finance, investing and business topics for more than 15 years, and covering crypto topics for more than 10 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. She is an avid podcaster, co-hosting the podcast at Money Talks News. Miranda lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.