Introduction
Crypto markets are notoriously volatile, and many investors find themselves holding assets that have dropped significantly in value or were sold at a loss. Fortunately, the IRS allows taxpayers to use these capital losses to offset gains and reduce their tax burden. Filing crypto losses correctly can lead to meaningful savings — but only if the process is handled properly. This article explains how to report crypto losses, leverage them against gains, and reduce your overall tax liability.
Understanding Capital Losses in Crypto
When you sell crypto for less than what you paid for it, the difference is a capital loss. These losses can be used to:
- Offset capital gains from other crypto or traditional assets
- Reduce up to $3,000 of ordinary income per year if losses exceed gains
- Be carried forward to future tax years if unused
Only realized losses — those resulting from an actual sale or disposal — can be reported. Unrealized losses (e.g., coins that dropped in value but weren’t sold) are not deductible.
Eligible Crypto Loss Scenarios
The IRS considers the following as qualifying events for crypto losses:
- Selling crypto at a lower price than the purchase cost
- Trading one token for another at a loss
- Spending crypto on goods/services at a loss compared to original cost basis
- Crypto becoming worthless (with appropriate evidence)
- Losses from rug pulls or scams (in some cases, under theft loss rules)
It’s important to document the date, cost basis, and proceeds for each transaction to support your filing.
How to Report Crypto Losses on Your Tax Return
To properly report your crypto losses:
- Use Form 8949
- List each crypto disposal individually
- Include date acquired, date sold, proceeds, cost basis, and resulting gain/loss
- Transfer totals to Schedule D
- Summarizes your total capital gains and losses
- Helps determine net capital gain or deductible loss
- Apply Loss Carryovers if Needed
- If your total losses exceed your gains plus the $3,000 limit, you can carry the remainder forward
Accurate recordkeeping is essential, and crypto tax software can help consolidate wallet and exchange data.
Wash Sale Rules and Crypto
As of 2025, the IRS does not apply wash sale rules to crypto — yet. This means:
- You can sell a crypto asset at a loss
Immediately repurchase the same asset - And still claim the full loss for tax purposes
However, proposed legislation may change this. Investors should stay informed and be cautious of last-minute law changes before filing.
Offsetting Other Income with Crypto Losses
If you have no capital gains for the year, crypto losses can still reduce your taxable income:
- Up to $3,000 of excess capital losses can be applied to ordinary income (e.g., wages, business profits)
- Losses beyond that can be carried forward indefinitely and used in future years
This strategy is especially valuable for long-term holders who cashed out during a bear market.
Common Mistakes to Avoid When Filing Crypto Losses
- Not Reporting All Transactions: The IRS can compare your return to data from exchanges (1099-DA).
- Incorrect Cost Basis Calculation: FIFO or specific identification methods must be used consistently.
- Mixing Personal and Business Assets: Losses must be accurately categorized.
- Ignoring Token Swaps: Exchanging one crypto for another triggers a taxable event — even if it feels like a reinvestment.
- Assuming Scammed Assets Are Always Deductible: Theft losses require legal documentation and meet strict IRS criteria.
Conclusion
Reporting crypto losses accurately is not just about reducing your tax bill — it’s also about staying compliant and prepared in an increasingly regulated environment. With the right strategy and documentation, your losses can become a valuable asset at tax time.
Block3 Finance helps crypto investors and businesses track, report, and file digital asset losses with accuracy and compliance. Our team ensures your records align with IRS expectations and maximize available deductions.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.