Crypto Losses & Tax Deductions (2024)

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Hey everyone, I’m Bette Hochberger, CPA, CGMA. Today is Web3 Wednesday, so I will discuss crypto losses and tax deductions. This will be a short guide on how to claim tax deductions for crypto losses. Let’s dive in!

Taxes & Crypto

Cryptocurrencies have gained popularity as investment assets, but their market can sometimes result in losses. The good news is that these losses can potentially be used for tax deductions! As a crypto accountant, it’s important to understand how to help clients claim tax deductions for crypto losses.

So, before I go further into detail, I want to add this first. The IRS treats cryptocurrencies like other capital assets, such as investment securities and real estate, when it comes to taxation.

If you make a profit from selling a cryptocurrency, it’s considered a capital gain and is taxed at a specific rate. On the other hand, selling a capital asset for less than its original cost results in a capital loss, which can potentially be deducted from your taxes.

Recognizing Crypto Losses

To claim tax deductions for crypto losses, accurately identify and document the losses. Keep track of all transactions, including purchases, sales, and other taxable events like trades or conversions. This information is vital when calculating losses for tax purposes.

Types of Crypto Losses

There are two types of losses eligible for tax deductions: capital losses and ordinary losses. Capital losses occur when you sell or dispose of a cryptocurrency held for over a year. Ordinary losses apply to cryptocurrencies held for less than a year or losses from activities like mining or trading as a business.

Calculating the Losses

Calculate crypto losses by determining the cost basis (purchase price plus fees) and the fair market value (FMV) of the cryptocurrencies at the time of the loss event.

Reporting Crypto Losses on Tax Returns

Follow the guidelines of your local tax authority when reporting crypto losses. Complete the appropriate tax forms, such as Schedule D or Form 8949. Provide accurate information about the loss amount, type of loss (capital or ordinary), and supporting documentation.

Carryover and Future Deductions

If crypto losses exceed gains or income in a tax year, you may carry over unused losses to future years. This allows you to offset future gains or income and potentially reduce your tax liability.

Seek Professional Advice

Cryptocurrency tax regulations can be complex and vary. Consult with a tax professional or accountant experienced in cryptocurrency taxation, such as myself, to ensure compliance and maximize deductions.

I hope you learned something new today. Claiming tax deductions for crypto losses can really help offset the financial impact of investment losses, so if you’re looking for help with this, feel free to reach out, and I’d be happy to help.

As always, stay safe, and I will see you next time.

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