Introduction
The cryptocurrency market is highly volatile, and losses can accumulate just as quickly as gains. If you have lost money on crypto investments, understanding how to report these losses can help you reduce your tax liability. In this guide, we’ll cover the five key things every crypto investor needs to know about reporting crypto losses and using them to offset taxable gains.
1. Crypto Losses Can Offset Capital Gains and Other Taxable Income
When you sell cryptocurrency for less than your purchase price, you incur a capital loss. This loss can be used to:
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Offset capital gains from crypto or other investments, reducing taxable income.
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Offset up to $3,000 of ordinary income per year if losses exceed gains.
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Carry forward any remaining losses to offset gains in future tax years.
For example, if you earned $5,000 in stock gains but lost $2,000 in crypto, you will only pay tax on the net gain of $3,000.
2. You Must Report Crypto on Your Taxes Even If You Lost Money
Many investors assume that if they only incurred losses, they don’t need to report crypto transactions. However, this is a mistake.
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Crypto exchanges provide transaction data to the IRS, which could indicate a taxable gain even if you actually lost money.
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Failing to report losses could raise red flags and increase the risk of a crypto tax audit.
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Reporting losses can lower your overall tax bill, so it’s in your best interest to file correctly.
3. Tax-Loss Harvesting is a Powerful Tool to Lower Your Bill
Tax-loss harvesting is a strategic approach where investors sell losing assets to offset taxable gains. Here’s how it works:
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Sell underperforming cryptocurrencies before the end of the tax year to realize a capital loss.
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Use the loss to offset capital gains from other assets.
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If you plan to reinvest, ensure you comply with tax rules to avoid triggering additional liabilities.
Tip: Crypto tax professionals can help you determine the best assets to sell for tax optimization.
4. You Can’t Always Claim a Loss for Theft, Scams, or Bankruptcy
Not all crypto losses are tax-deductible. Losses due to exchange failures, theft, or scams may not qualify as capital losses under IRS rules.
Bankruptcy Losses
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If a crypto exchange goes bankrupt (e.g., FTX, Celsius, BlockFi), you may not be able to claim a loss immediately.
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The IRS requires you to wait until the bankruptcy proceedings conclude, as there is a possibility of recovering funds.
Theft, Fraud, and Scams
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Personal theft or crypto scams are not deductible under the Tax Cuts and Jobs Act (TCJA) unless tied to a federally declared disaster.
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If you were a victim of a scam, consult a tax professional to explore any potential deductions or legal options.
5. Crypto Tax Software May Not Recognize All Losses
While crypto tax software is a helpful tool, it isn’t perfect and may not account for all transactions correctly.
Common Issues with Crypto Tax Software:
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Incomplete transaction history from exchanges and wallets.
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Failure to match transfers across platforms, causing tax overestimation.
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Incorrect cost basis calculations leading to inaccurate loss reports.
Solution: If your crypto tax report seems incorrect, consult a tax professional to verify your results and maximize your deductions.
How to Report Crypto Losses on Taxes
Follow these steps to ensure accurate reporting of your crypto losses:
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Gather Transaction Records – Collect all crypto trading, buying, and selling data from exchanges and wallets.
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Calculate Gains and Losses – Determine profit or loss for each taxable transaction.
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Complete Form 8949 & Schedule D – Report capital gains and losses on IRS Form 8949 and summarize on Schedule D.
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Consider Professional Assistance – Given the complexities of crypto taxation, consulting a tax expert ensures compliance and maximizes deductions.
For more details, check out our guide: How to Report Cryptocurrency on Your Taxes.
Conclusion
Crypto losses can be strategically used to lower your tax bill and offset gains. However, proper reporting is essential to stay compliant and avoid IRS scrutiny. By leveraging tax-loss harvesting, tracking transactions correctly, and seeking expert guidance, investors can minimize their tax liability and plan for future gains effectively.
At Block3 Finance, we specialize in crypto tax planning and reporting to help investors maximize deductions and stay compliant with evolving regulations. Contact us today to get expert assistance with your crypto tax filings.
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.