Cryptocurrency may have been easily dismissed as a passing fad. However, the concept has since evolved into one of the most lucrative income-generating opportunities.
Many publications now rank cryptocurrency trading among the most practical ways to make money online. The industry appeals mainly to those interested in earning money on the side.
What makes cryptocurrency worth exploring is that there are multiple ways to enter the market. Your earnings depend mainly on your investment model.
Even more exciting is that you can claim crypto losses on taxes as an intelligent way to minimize your taxable income. This article provides a definitive guide on how to claim crypto losses on taxes. But first things first.
The Concept of Claiming Losses on Taxes
Before we delve deeper into crypto losses and examine whether you can use them to offset your taxes, it’s best to familiarize yourself with the general concept of claiming losses on taxes.
Claiming losses on taxes implies leveraging losses made during a financial year to offset the taxes levied on certain transactions during the same period.
The whole idea of claiming losses is to reduce your tax obligations. Using this concept, you can convince the Internal Revenue Service (IRS) to help you mitigate your financial burden.
Can You Make Profit With Cryptocurrency?
We’ve already hinted that cryptocurrency is among the most profitable income-generating opportunities. The industry employs thousands worldwide. It’s one of the few genuine sectors that can turn you into an overnight millionaire.
The fact that cryptocurrency provides a hands-off approach to trading makes it a popular online passive income venture. It’s possible to make $100 a day trading cryptocurrency, provided that you follow the expert tips.
Can You Make Losses With Cryptocurrency?
Profits or losses are the only two possible outcomes of any investment venture. And cryptocurrency is no exception.
Crypto trading may offer lucrative money-making opportunities. However, cases of massive losses aren’t unheard of.
Recent statistics indicate that the crypto market plunged by almost $1.4 trillion in 2022. The industry’s dwindling fortunes were largely attributable to several bankruptcies and the early-November collapse of FTX, the renowned Bahamas-based cryptocurrency exchange.
The fact that cryptocurrency isn’t immune from losses brings into focus the possibility of claiming crypto-related losses on taxes.
But can you claim crypto losses on taxes?
Well, the following sections help put this question into a better perspective.
Claiming Cryptocurrency Losses on Federal Income Tax
The short answer to the question ‘can you write off crypto losses’ is yes, it’s possible to write off cryptocurrency losses on taxes. Perhaps the more pertinent question should be how to go about that. To fully unpack this question, it’s essential to understand what the IRS considers cryptocurrency losses and the procedure for claiming them.
What Are Cryptocurrency Losses?
A loss is a negative difference between an asset’s selling and purchase prices.
In cryptocurrency, that negative balance can result from several factors. It depends mainly on your current investment model.
For instance, you can make losses by disposing of assets at a lower price than you purchased them for. You might also lose your investments when your crypto assets are rendered worthless. This could happen because such assets can no longer be listed or traded in an exchange platform, as with many traders who relied on FTX before the company’s liquidation.
As a wise crypto trader, you’d want to take all the necessary measures to guard against losses. That includes finding the best time to sell your crypto assets while staying abreast of emerging economic and regulatory trends.
However, you can never seize complete control of the industry. Things will occasionally go south despite implementing the smartest crypto investment tips. And that’s when you might consider claiming your crypto losses on taxes.
What Taxes Can You Offset With Cryptocurrency Losses?
One thing to note before using cryptocurrency losses to mitigate your tax burden is that crypto losses tax only applies to capital gains tax.
Capital gains taxes are levied on the profits earned from selling capital assets. They range from real estate to stocks, bonds, and cryptocurrencies.
Cryptocurrency loss claims kick in when you dispose of a capital asset at a loss. The claims help lower your taxable income, further reducing your tax bill.
Even better is that successful cryptocurrency loss claims can help offset future capital gains. This is instrumental where the transactions apply to carryovers.
Crypto loss claims can help lower your tax bill by up to $3,000. However, this ultimately depends on the nature of your losses and the duration you’ve owned the said crypto assets.
Short- versus Long-term Cryptocurrency Capital Gains Taxes
As with other capital gains, cryptocurrency gains can be short-term or long-term.
Short-term gains are typically levied on profits of crypto assets held for one year or below. The IRS levies such taxes at about the same rate as regular income tax, ranging from 10% to 37%.
Conversely, long-term gains are levied on profits for investments held for over one year. These investments attract a lower capital-gains rate of 0% – 20%.
Remember that cryptocurrency gains or losses don’t only apply to directly trading crypto assets, such as selling crypto coins. It also entails paying for goods and services using crypto assets. You only need to calculate the purchasing power to determine whether you’ve made a gain or loss.
Feel free to check out these YouTube resources for insights into various aspects of cryptocurrency trading.
In What Scenarios Can’t You Claim Crypto Losses?
We’ve highlighted a few instances where you could make losses trading cryptocurrencies. You must have gotten the answer to the question – are crypto losses tax deductible?
But don’t celebrate yet. As you’ll find, specific scenarios make crypto losses tax deductible.
To determine whether you can use your cryptocurrency assets to offset taxes, it’s important to understand how you incurred the losses. You can only claim crypto losses on taxes if the losses result from direct asset disposition.
A noteworthy exception is if a cryptocurrency plunges dramatically before you can sell it, and the issuer is working hard to revive its value. Your only way out here would be to discard the coins and claim abandonment loss intentionally.
Claiming a crypto loss is also impossible if your assets have no liquidity. That’s because there would be no reliable counterparty to establish the coin’s sale or exchange in such circumstances.
Besides, you cannot claim tax relief on crypto losses for stolen, lost, or misplaced cryptocurrencies.
The saving grace is that you can sell your crypto assets at a loss to offset your capital gains. This concept is known as tax-loss harvesting, and it generally applies where you don’t rebuy assets within thirty days of disposing of them.
What’s The Formula for Calculating Crypto Losses?
Use the below formula to compute your crypto capital loss;
Capital Loss = Proceeds – Adjusted Cost Basis
‘Proceeds’ are the total amount realized from disposing of a crypto asset, while ‘adjusted cost basis’ is the sum you acquired the asset for, including any transaction fees. A negative result means you incurred a loss and can claim a crypto loss on your taxes.
The above formula applies regardless of how you received cryptocurrency.
How Do You Report Cryptocurrency Losses On Taxes?
One of the frequently asked questions by cryptocurrency traders is, do I have to report crypto on taxes if I lost money?
The answer is a resounding yes.
Cryptocurrency transactions are taxable at capital-gains tax rates. Therefore, reporting any income, gain, or loss from such transactions to the federal income tax is obligatory within the taxable year. That’s regardless of whether you’ve received any corresponding form from the transaction.
Crypto losses are typically reported on Form 8949. Below is a brief procedure on how to claim crypto losses on taxes;
- Check the forms your cryptocurrency exchange platform sent to you to establish if the exchange reported the cost basis for each transaction to the IRS.
- Separate the form 1099-Bs that reported the cost basis from those that didn’t.
- In case you made other cryptocurrency transactions that incurred losses but the transactions did not generate Form 1099-Bs, document the following information;
- The acquisition date of the crypto asset
- The asset’s cost basis
- Disposal date
- Disposal amount
- Document every crypto transaction that incurred losses on Form 8949.
Be sure to specify transactions that generated Form 1099-Bs and those that did not for trades that generated Form 1099-Bs, including those that reported the cost basis to the IRS and those that did not. And for all forms, indicate whether the trade was short-term or long-term by checking Box A, B, or C.
- Input the net losses computed using Form 8949 on the Schedule D section of IRS Form 1040.
- Use Part I for short-term crypto losses and Part II for long-term losses.
- Fill out the details for each line depending on the information retrieved from the various boxes you checked.
If you claim abandonment losses, use IRS Form 4797, Line 10.
If you suffered crypto losses across all your assets, you’re eligible for deductions of up to $3,000 from your taxable income. Besides, you can leverage your losses to offset other capital gains in the current or future tax years.
Filing tax relief claims on crypto losses is an ingenious way to mitigate capital gains tax. You can be eligible for up to $3,000 deductions from your income depending on the nature of your losses and the duration you’ve held onto your crypto assets.