If you invested in crypto this year, you might have suffered huge losses as cryptocurrency prices plunged recently. But there’s a silver lining: these losses from the highly volatile crypto market are opportunities to pay less taxes on cryptocurrency. Read on to understand how to report crypto losses on your taxes and how to use them to cut down your tax bill!
1. Do You Have to Report Crypto Losses to the IRS?
Yes, you have to report your crypto losses to the IRS. Since the IRS considers cryptocurrency as property, you must report your capital gains or losses when you sell or transact with your cryptocurrency (as is the case for stocks).
Capital losses in cryptocurrency can be used to offset capital gains, ultimately lowering your capital gains tax. You can also use them to deduct from your ordinary income - all the more reason why you should report your crypto losses on your taxes.
2. How to Deduct Cryptocurrency Losses on Taxes?
Take a look at the following examples to understand how to deduct your cryptocurrency losses from your income.
1) Did you have capital gains?
If so, use your cryptocurrency losses to offset those capital gains — both stocks and crypto.
Suppose you had a $2,500 long-term capital loss from the sale of ETH and a $3,000 long-term capital gain from the sale of Apple stock in the same tax year.
1. If reporting only the capital gain from your stocks, you pay taxes on a $3,000 capital gain.
2. If reporting both the capital gain from your stocks and capital loss from cryptocurrency, the $2,500 capital loss offsets the $3,000 capital gain, so you pay taxes on only a $500 capital gain.
2) What if you didn't have capital gains to offset?
Then use your capital loss to deduct up to $3,000 ($1,500 if married, filing separately) from your ordinary income. The remaining losses after the $3,000 deduction can also be carried over indefinitely into future tax years until you have none left.
Let’s suppose you had a $24,000 short-term capital loss from the sale of BTC and a $4,000 short-term capital gain from the sale of Amazon stock in the same tax year.
Your capital loss from cryptocurrency offsets the $4,000 short-term capital gain, eliminating capital gains taxes.
Of the remaining $20,000 capital loss after offsetting the short-term capital gain, you can use $3,000 of it to deduct your ordinary income for the tax year. The rest can be carried over to future tax years to offset capital gains or deduct up to $3,000 from your income each year.
3. How to Pay Less Taxes on Cryptocurrency
To report a capital loss on your taxes, you need to recognize your loss by selling or trading your cryptocurrency when the price drops. You won’t recognize a capital loss if you simply continue holding it.
By selling investments at a loss, you can offset other capital gains and reduce your tax liability - this is called tax loss harvesting. Another investment “strategy” used in conjunction is the wash sale. However, the wash sale may be prohibited in crypto transactions starting from 2022, as a part of the Biden administration’s Build Back Better Act, pending in Congress. We will keep you updated on this.
Here’s an example to better explain these concepts:
Suppose you purchase 3 BTC for $80,000 total. After a price drop six months later, 3 BTC are now worth only $60,000. Instead of holding, you sell the 3 BTC at $60,000.
Your net capital loss is $20,000, which you can use to offset other capital gains or deduct up to $3,000 from ordinary income. This is tax loss harvesting.
You sell 3 BTC at a loss and repurchase them at $58,000 within 30 days. This allows you to use the tax loss harvesting strategy to save on taxes and also retain your BTC. This is the result if the wash sale rule doesn’t apply to crypto.
4. How to Report Crypto Losses on Your Taxes
Capital losses from your cryptocurrency are reported on Form 8949. You will need to list transactions in different sections of Form 8949 depending on whether they were short-term or long-term and whether they have been reported to the IRS via 1099-B or not. After entering the details, calculate the total sum of proceeds, choose your best cost basis, and input your net capital gain/loss at the bottom of Form 8949.
Here are some tips for filling out Form 8949:
Tip 1: Short-term gains and losses are listed in Part 1 and long-term gains and losses in Part 2.
Tip 2: List transactions for each box you check below, on a separate Form 8949:
|Check box...||If your crypto transactions were...|
|A||Short-term and reported on Form 1009-B|
|B||Short-term and reported on Form 1099-B, |
but the cost basis was not reported to the IRS
|C||Short-term and were not reported on Form 1099-B|
|D||Long-term and reported on Form 1009-B|
|E||Long-term and reported on Form 1099-B, |
but the cost basis was not reported to the IRS
|F||Long-term and were not reported on Form 1099-B|
Tip 3: Include cryptocurrency transaction details (purchase date, selling date, type of cryptocurrency, cost basis, selling price, transaction fee) and report the net capital gain or loss.
Transactions recorded on Form 8949 will be summarized and reported on Schedule D.
While Form 8949 lists each transaction detail based on the type of transaction (short-term, long-term, and Box A, B, C, D, E and F), Schedule D reports the net short- or long-term gain or loss from all your capital gains and losses. You have to file both Form 8949 and Schedule D when you report taxes on your capital gain or loss.
5. Benefits of Using Crypto Tax Software
With Cointelli, your crypto tax report is in good hands. We thoroughly analyze the transactions you import from your exchanges and automatically enter all capital gains and losses into Form 8949 for you to generate a meticulous tax report.
Click here to learn more about reporting crypto losses on your taxes and how to pay less taxes on your cryptocurrency.
Got any crypto tax questions? Ask us on Twitter! Our co-founder & crypto tax expert Daniel @Cointelli_Dan will answer you directly!