It’s tax season, and if you’ve lost money on cryptocurrency this year, you might be able to claim those losses on your taxes. Here’s how.
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What are crypto losses?
Cryptocurrencies, like any other asset, can go up or down in value. When the value of your crypto goes down, you have a “crypto loss.” If you sell your crypto for less than you paid for it, or if you trade one crypto for another and the value of the crypto you receive is less than the value of the crypto you traded away, you have a realized loss.
What tax form do I use to report crypto losses?
If you have sold or traded cryptocurrency at a loss, you can claim those losses on your taxes. The process is similar to claiming losses on other investments, and you will need to report the losses on Schedule D of your tax return.
When reporting your crypto losses, be sure to include:
-The date of the sale or trade
-The amount of the loss
-The type of cryptocurrency involved
-The price at which you sold or traded the cryptocurrency
How do I calculate my crypto losses?
Unfortunately, there is no easy answer when it comes to calculating your crypto losses for tax purposes. The IRS has not provided any official guidance on the matter, so it is up to each individual taxpayer to figure out the best way to track and report their losses.
One approach that some taxpayers have taken is to treat their crypto losses like stock market losses. Under this method, you would calculate your loss by subtracting your cost basis (i.e. what you paid for the crypto) from the current market value of the crypto. For example, if you bought 1 BTC for $10,000 and it is now worth $5,000, your loss would be $5,000.
Another approach is to treat your crypto losses as gambling losses. This approach is more complicated and may not be accepted by the IRS, but it could potentially offer a larger deduction. Under this method, you would first calculate your net gambling winnings/losses for the year (including all types of gambling). You would then deduct any losses up to the amount of your winnings, with any excess losses carried over to future years. So, if you won $5,000 from gambling and lost $10,000 from investing in crypto, you could deduct $5,000 of your crypto losses on your taxes (assuming you had no other gambling wins/losses for the year).
Of course, these are just two potential methods for calculating your crypto losses for tax purposes. There is no right or wrong answer here; it ultimately depends on what makes sense for your particular situation and what you are comfortable with. If you are unsure of which method to use, we recommend talking to a tax professional who can help you figure out the best way to proceed.
How do I report crypto losses on my taxes?
If you’ve sold cryptocurrency at a loss, you may be able to deduct that loss on your taxes. In order to do so, you’ll need to report the sale as a capital loss.
To report a capital loss on your taxes, you’ll need to fill out IRS Form 8949. On this form, you’ll list each crypto transaction that resulted in a capital loss. For each transaction, you’ll need to include the date of the sale, the number of units sold, the sales price, and the cost basis. The cost basis is usually the price you paid for the crypto, plus any fees or commissions associated with the purchase.
Once you’ve filled out Form 8949, you’ll need to total up all of your capital losses and carry that number over to Schedule D of your Form 1040. On Schedule D, you’ll also list any capital gains you made from selling crypto. If your total capital losses are more than your total capital gains, you may be able to deduct up to $3,000 of those losses from other forms of income (such as wages or investment income). If your losses are more than $3,000, you can carry them forward to future tax years.
For more information on how to report crypto losses on your taxes, please consult IRS Publication 550 or speak with a tax professional.
What if I don’t have a record of my crypto losses?
The IRS requires that you keep records of all your crypto transactions in order to claim losses on your taxes. If you don’t have a record of your losses, you may still be able to claim them by using your bank or credit card statements to prove the cost basis of your crypto purchases.
What if I have a mix of crypto gains and losses?
If you have a mix of crypto gains and losses, you can use either short-term or long-term rates, depending on which is more beneficial for you. You’ll need to calculate your gain or loss for each individual crypto asset first.
Here’s how to calculate your gain or loss for each asset:
1. Find the cost basis of the asset. This is usually the price you paid for it, but if you received it as a gift or reward, the cost basis would be its fair market value at the time you received it.
2. Determine the fair market value of the asset at the time you sold it or otherwise disposed of it. This is usually the price you sold it for, but if you gave it away, the fair market value would be its fair market value at the time you gave it away.
3. Subtract the cost basis from the fair market value to determine your gain or loss. If your cost basis is more than your fair market value, you have a capital loss.
What if I only have crypto gains?
If you only have gains, you don’t need to do anything special. Just include your gains on Schedule D of your tax return, and you’ll be all set.
What if I have more than $3,000 in crypto losses?
To deduct crypto losses of more than $3,000, you’ll need to itemize your deductions using Schedule A of Form 1040. This means your total deductions must exceed the standard deduction, which is $12,200 for single filers and $24,400 for joint filers in 2020.
What if I have a net operating loss (NOL)?
If you have a net operating loss (NOL), you may be able to carry back the loss to offset income in prior years or carry the loss forward to offset income in future years
Can I carry forward my crypto losses to future years?
If you’ve incurred a capital loss on your crypto holdings, you may be able to carry those losses forward to offset gains in future years. In order to do so, you’ll need to file your losses with the IRS using Form 1040 Schedule D.
Carrying forward losses can be a complex process, so it’s important to consult with a tax professional before taking any action. They can help you determine if you’re eligible to carry forward your losses, and if so, how best to proceed.