Can You Write Off Crypto Losses

Writing off crypto losses can reduce your taxes in many ways. For example, the tax rate will depend on your short-term and long-term gains — higher capital gains equal lower taxes.

With that in mind, we’ll discuss the difference between short-term and long-term gains. You’ll also find out how crypto losses can affect your taxes and how to calculate them. We’ll finish this guide by explaining the crypto wash sale rule.

Can You Write Off Crypto Losses?

Can I write off crypto losses? The short answer is — you can! You do this by reporting them on your tax return form. Namely, the IRS considers all digital assets property, meaning they will be taxable.

How Much Crypto Loss Can I Write Off?

You can write off a maximum of $3,000 per year on your crypto losses. All amounts above this threshold will be separated into short-term and long-term gains that will be carried over to the next tax year. You’ll also be able to write off your crypto losses if you have no gains. Moreover, in some cases, you’ll be able to do the same if you lose your digital assets due to the crypto exchange going bankrupt.

However, the only way to write off your losses is to realize them, which means disposing of your crypto. This may include selling it for fiat, exchanging it for another cryptocurrency, or using it to pay for goods and services. 

Do crypto losses offset stock gains? Yes, crypto losses can be used to offset capital gains from both equities and stocks.

Next, we’ll discuss the main difference between short-term and long-term gains.

Long-Term vs. Short-Term Capital Gains

As mentioned above, when reporting your crypto losses, you’ll have to divide them into short-term and long-term gains. The former term refers to digital assets that are held for less than a year. The latter refers to holding cryptocurrencies for more than a year. In the case of residual losses, long-term losses can offset short-term losses and vice versa.

That said, short-term capital gains come with higher taxes than their long-term counterparts — they are taxed as ordinary income. This means that short-term taxes range between 10% and 37%, depending on the income bracket and filing status. For example, a single filler will pay a 10% tax on an income bracket that ranges between $0 and $11,000.

On the other hand, long-term capital gains are not taxed as ordinary income. The tax rate on long-term gains will range from 0% to 15% and 20%, depending on the filing status and income. For example, a single filler will pay zero taxes on an income bracket between $0 and $47,025. Income brackets between $47,026 and $518,900 come with a 15% tax fee, while the tax fee for amounts above $518,901 is 20%.

How to Calculate Crypto Losses

You can calculate your crypto losses by subtracting the market value of your digital asset in US dollars on the date of disposal from its market value on the day you purchased it. You can also use crypto tax calculators.

Income Tax Deduction

Your tax rate will depend on your income tax bracket. As mentioned above, the tax rate for an ordinary income ranges between 10% and 37%. If you experience losses on your assets, you can deduct a maximum of $3,000 from your income. This means you’ll save between $300 and $1,110, depending on your bracket.

However, if you experienced gains, you won’t be able to subtract your income losses. You’ll only be able to use them to offset capital gains from other assets. You can reduce your taxes by lowering your income. For example, you can put your funds into health savings accounts, contribute to a traditional 401(k), or donate your funds to charity. You can also invest in municipal bonds, max out your retirement account, and claim tax credits.

Offsetting Capital Gains

You’ll pay lower taxes if you offset your capital gains with capital losses. I.e., you’ll have to subtract the losses of your sold digital assets from taxable gains on digital assets that have appreciated in value. However, make sure to offset losses of the same type. Remember that short-term losses will reduce your short-term gains, while long-term losses will reduce your long-term gains.

Next, you’ll have to use your net losses to offset other types of capital gains. For instance, you can apply your short-term losses against your remaining long-term capital gains. Remember that your capital loss comes with a limited amount of $3,000 annually.

How Crypto Losses Impact Your Taxes

Losses you experience through the sale or conversion of cryptocurrencies will be considered capital losses. These losses can be used to reduce capital gains. You’ll also be able to transfer them to the next fiscal year.

There are two types of losses: realized and unrealized. The former can be used for capital gain reduction, while the latter can be used only after they become realized losses.

So, in short, are crypto losses tax deductible? Yes, they can be used to offset capital gains taxes.

How to Report Crypto Losses on Taxes

To report crypto losses on taxes, you’ll have to do the following:

• Divide your transactions into short and long-term gains.
• Use Form 8949 and enter the coin’s name and quantity, acquisition and disposition date, sale price, and cost basis. You’ll also need to calculate your gains/losses by subtracting the cost basis from the selling price.
• Enter your net gain/losses using Schedule D (Form 1040). Enter short-term gains/losses in Part I and long-term gains/losses in Part II. If you want to claim a loss on a discarded and delisted crypto, use Form 4797, Line 10, and enter the loss amount.

The Tax Savings by Claiming Crypto Losses

By reporting your crypto losses, you’ll be able to save on taxes. To do this, you must make your digital currency a taxable event. Taxable events include:

• Selling crypto for cash (if the selling price is higher than the purchase price)
• Converting cryptocurrencies, for example, buying BTC with ETH
• Spending crypto on goods and services
• Getting paid in crypto
• Mining crypto
• Earning staking rewards
• Getting crypto from a hard fork
• Getting crypto from airdrops

You can also use the crypto tax-loss harvesting strategy by selling your crypto holdings at a loss and repurchasing them to realize a loss. In this way, you will be able to offset the taxes on your regular income.

What Is the Wash Sale Rule in Crypto?

Now that you know everything about reporting crypto losses on taxes, let’s discuss the role of the wash sale rule in cryptocurrencies. The wash sale rule refers to selling securities at a loss and repurchasing them within 30 days (before or after the sale occurred).

Loss is, as a result, disallowed for tax purposes. However, this rule can’t be applied to cryptocurrencies since they are not considered securities but property. This means that crypto wash sales are technically legal, although this could change soon.

Conclusion

Now that you know how to claim crypto losses on taxes and how to report them to the IRS, remember that you can write off a maximum of $3,000 per year. Moreover, make sure to keep the records of your trades.

This will help you pinpoint your acquisition costs more efficiently. Keep in mind that only realized losses can be used for capital gain reduction. This means that you’ll first have to dispose of your digital assets.

FAQs