Crypto losses and tax deductions

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Skip to ContentCrypt Losses and Tax Deductions

By Bette Hochberger, CPA, CGMA

Hi 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 and crypto

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

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

If you make a profit selling cryptocurrency, this is 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.

Recognize 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 exchanges or conversions. This information is essential when calculating losses for tax purposes.

Types of Crypto Losses

There are two types of losses eligible for the tax deduction: capital losses and ordinary losses. Capital losses occur when you sell or dispose of cryptocurrency that has been held for more than a year. Ordinary losses apply to cryptocurrencies held for less than a year or losses resulting from activities such as mining or trading as a business.

Calculation of losses

Calculate crypto losses by determining the cost basis (purchase price plus fees) and fair market value (FMV) of 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 specific information about the amount of loss, type of loss (capital or ordinary), and supporting documentation.

Carry forward and future deductions

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

Ask a professional for 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.

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, please don’t hesitate to reach out, and I’d be happy to help. help.

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

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Bette is the founder of the company that bears her name. After launching her career in private accounting with tech startups and nonprofits in Boston and Miami, she transitioned into public accounting at large regional firms. She founded her company so she could focus on the needs of small business owners instead of seeking billable hours from large corporations.

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