The Surprising Truth About Crypto Losses and Tax Savings (2024)

FAQs

The Surprising Truth About Crypto Losses and Tax Savings? ›

You can deduct up to $3,000 a year in capital losses from your taxable income and can carry over losses exceeding that annual limit to future years. For example, if you had $5,000 in capital losses in 2022, you can reduce your taxable income by $3,000 in 2022 and apply the remaining $2,000 in losses to 2023.

Cryptocurrency losses can offset taxes on capital gains from various assets, such as stocks, real estate, and profitable crypto trades. Reporting these losses on your tax return is crucial to reap the benefits. This can decrease your taxable income, ultimately resulting in significant savings on your total tax bill.

Can you write off crypto losses on your taxes? Yes. Cryptocurrency losses can be used to offset your capital gains and $3,000 of personal income for the year.

Crypto wash sales

It's entirely legal to harvest your losses at the end of the year.

The same-day rule in share pooling determines the cost basis based on the cost of crypto acquired on the same day, helping prevent 'bed-and-breakfasting' tax avoidance. The 30-day rule states that if a crypto asset is sold and repurchased within 30 days, the cost basis is the purchase cost of the newly acquired asset.

This deduction is limited to $3,000 each year, or $1,500 if you are married filing separately. Losses above $3,000 will be separated back into short-term and long-term, and they will be carried over into the next tax year. Those losses are then netted against the following year's gains until they get used up.

If you are claiming an abandonment loss on a delisted, worthless cryptocurrency you have discarded, enter the amount of the loss using IRS Form 4797, Line 10.

US taxpayers must report any profits or losses from trading cryptocurrency and any income earned from activities like mining or staking on tax return forms, such as Form 1040 or 8949. Not reporting can result in fines and penalties as high as $100,000 or more severe consequences, including up to five years in prison.

Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell. If you earned crypto through staking, a hard fork, an airdrop or via any method other than buying it, you'll likely need to report it, even if you haven't sold it.

Bankruptcy and Frozen Accounts

If your digital asset investment account is frozen or your digital assets are tied up in bankruptcy proceedings, you can't claim a taxable loss because you don't have a closed and completed transaction.

Should I sell crypto at a loss? ›

Do I have to pay taxes if I sell crypto at a loss? Selling cryptocurrency at a loss can reduce your tax bill by offsetting capital gains from cryptocurrency, stocks, and other assets.

Crypto investment losses can be used to offset capital gains in other asset classes such as stocks. Investors also can use them to offset up to $3,000 per year in ordinary income.

Is there a crypto wash sale rule? The IRS does have a wash sale rule. The US wash sale rule occurs when an individual investor sells or trades an asset at a loss and buys back a "substantially identical" asset within 30 days. If an investor does this - they cannot claim a capital loss.

Never Invest More than You Can Afford to Lose

For that reason, the first principle is only to invest an amount of capital that you are fully prepared to lose should the market take a downturn. At the very least, you should have enough emergency savings before putting any funds into crypto.

There's a saying in the industry that's fairly common, the '90-90-90 rule'. It goes along the lines, 90% of traders lose 90% of their money in the first 90 days.

A 51% attack occurs when a single miner (or group of miners) controls more than half of a blockchain network's hash rate (or computing power).

Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell. If you earned crypto through staking, a hard fork, an airdrop or via any method other than buying it, you'll likely need to report it, even if you haven't sold it.

To keep track of capital loss carryovers, the IRS provides a worksheet or form within the Schedule D instructions. This worksheet typically helps you calculate and document the amount of capital loss that you can carry over from one tax year to the next.

If you believe you or someone you know may be a victim of a cryptocurrency scam, immediately submit a report to the FBI Internet Crime Complaint Center (IC3) at www.ic3.gov or contact your local FBI Field Office and provide as much transaction information as possible.

You report if you transferred to fiat or another asset, those are taxable. If you lost money then you write it off, if you made money (even in a conversion to another crypto) then it's a capital gain.