What You Need to Know About Tax Deducting Cryptocurrency Losses

If you’ve lost money investing in cryptocurrency, can you deduct your losses on your tax return? The simple answer is no, but there are some important exceptions that can help ease the sting of your losses. Cryptocurrency isn’t covered by the Internal Revenue Service (IRS) and taxpayers should be prepared to pay taxes on any gains or losses related to their cryptocurrency transactions. For example, if you bought $500 worth of Bitcoin in 2016 and then sold it for $1,000 in 2017, that profit would be taxable and must be reported on your tax return.

Are Cryptocurrency Losses Really Tax Deductible?
This depends on a few things, like your income, what you’re investing in and why you bought it. If you have lost money because of a bad investment (or a scam), you may be able to deduct that loss if you itemize your deductions. According to IRS Publication 544, You can generally deduct losses from unsuccessful business ventures. In some cases, however, special rules apply that might limit or disallow a deduction for a loss. As cryptocurrency becomes more prevalent as an investment vehicle—and one that is vulnerable to scams and hacker attacks—consumers will likely look for ways to recover losses from these investments.

How Will We Report Our Crypto Income and Losses?
In short, every U.S. taxpayer—whether an individual or a business—is required to report cryptocurrency transactions as taxable income on his or her tax return and pay any related taxes due. In addition, taxpayers are required to keep track of any capital gains and losses from crypto transactions in order to accurately determine their taxes owed. (See also: Do I Have To Pay Taxes On My Bitcoin? Here’s What We Know.) Those who fail to properly report these activities may be subject to civil penalties and even criminal prosecution. Ultimately, it is up each taxpayer (or his or her accountant) is responsible for reporting all relevant information correctly on their tax returns. The IRS may not know about your crypto activity if you don’t tell them about it!

So Which Crypto Assets Are Actually Subject to Taxes?
Whether or not cryptocurrency is subject to taxes depends on a few different factors. First, it’s important to note that some countries have classified cryptocurrency as property (much like gold or real estate), while others treat it as a form of currency. As such, currencies may be subject to capital gains and losses tax regulations, while properties are not. Depending on how much you’ve invested in crypto over time, your losses could be covered by capital loss limitations rules if they amount less than $3,000.

Are There Limitations on the Type of Loss I Can Claim?
Yes, losses are only deductible if they are considered capital in nature. If your loss is incurred through a casualty or theft—as opposed to an investment—it may not be deductible. Furthermore, your taxable income must fall below a certain threshold (which varies depending on your filing status and other factors) for you to even consider deducting losses. Additionally, unless you qualify as a trader—and there are very specific rules about that—you can only deduct capital losses up to $3,000 annually per trade. Any excess amount carried over from one year to another is simply carried forward indefinitely until it can be deducted against future capital gains.

When Do I Have To Report My Crypto Gains and Losses?
When you exchange your cryptocurrency for fiat currency, like USD, or another cryptocurrency, you trigger a taxable event. This means that any increase or decrease in value between buying and selling is taxed as either a capital gain or loss. If you use your coins to buy goods and services, then it’s considered a like-kind exchange and no capital gains taxes are triggered. However, you must keep records of these transactions because when it comes time to sell, what you have left will be considered your basis (the starting point for calculating your gain/loss). There are also special rules when transferring property between spouses.

Can I Choose My Own Method For Calculating Gains and Losses?
Capital losses are deductible from your capital gains. In other words, if you have a loss for a given year and also have a gain for that same year, then you would offset (i.e., deduct) your gain with your loss and pay tax on any excess. Most individuals are allowed to carry forward their capital losses into future years and deduct them from their income in those years until they either run out of carry-forwards or hit their lifetime capital loss limit ($3,000). For example, if an individual has $4,000 in gains one year but incurs $5,000 in losses that same year, then he/she would only pay tax on $1,000 of his/her gains—the excess is deferred until future years.

Claiming Capital Loss Carry-Forwards From Prior Years
One of the most important tax strategies for cryptocurrency traders is using capital loss carry-forwards from prior years. For example, in 2017, if you realize a $10,000 loss on your cryptocurrency transactions (whether trading or mining), you can deduct that $10,000 loss against your ordinary income up to $3,000. If you’re married and file jointly with your spouse and report all of your income and deductions on a joint return, you could deduct up to $6,000 of losses against ordinary income. However it’s important to keep in mind that these capital loss carry-forwards expire after five years for most people.