Can I Claim My Crypto Loss on Taxes?

Cryptocurrencies are digital assets that the Internal Revenue Service (IRS) treats as property for tax purposes, similar to stocks or real estate. This classification means that general tax principles applicable to property transactions apply to digital assets. Gains from cryptocurrency transactions are generally taxable, and losses may be deductible under specific conditions.

Understanding Crypto Taxable Events and Losses

A “taxable event” for cryptocurrency occurs when a disposition of the asset takes place, which can result in a realized gain or loss. Merely holding cryptocurrency whose value has decreased does not create a deductible loss; the loss must be “realized” through a specific action. Common taxable events triggering a loss include selling cryptocurrency for fiat currency, exchanging one cryptocurrency for another, or using it to purchase goods or services. Each of these actions is treated as a sale or exchange, requiring the calculation of a capital gain or loss.

Calculating a loss requires understanding the cryptocurrency’s “cost basis.” Cost basis refers to the original purchase price of a crypto asset, including any associated acquisition fees. For example, if cryptocurrency was bought for $1,000 with a $20 transaction fee, the cost basis would be $1,020. A capital loss occurs when proceeds from selling, exchanging, or spending crypto are less than its cost basis. If proceeds exceed cost basis, a capital gain is realized.

Essential Record Keeping for Crypto

Maintaining accurate and comprehensive records of all cryptocurrency transactions are vital for calculating gains and losses and supporting tax return claims. These records should include specific details for each transaction, such as the date of acquisition, the type of transaction (buy, sell, trade, exchange), the quantity of cryptocurrency, its fair market value at the time of transaction, the cost basis, and sale proceeds.

Proper documentation is essential for accurately determining capital gains or losses. Without it, taxpayers risk overpaying taxes or facing audit penalties. Taxpayers should download complete transaction histories from all exchanges and wallets, combining this information into a single dataset. This dataset should include every buy, sell, trade, deposit, and transfer between accounts.

Applying Tax Rules to Crypto Losses

Cryptocurrency losses are treated as capital losses, categorized as either short-term or long-term depending on the holding period. If the cryptocurrency was held for one year or less before disposition, any loss is considered short-term. If held for more than one year, the loss is long-term. Capital losses can offset capital gains, with short-term losses offsetting short-term gains and long-term losses offsetting long-term gains.

For individual taxpayers, if capital losses exceed capital gains, up to $3,000 of the excess loss can be deducted against ordinary income annually. Any remaining capital loss exceeding this $3,000 limit can be carried forward indefinitely to offset capital gains or up to $3,000 of ordinary income in future tax years.

Taxpayers can choose from different cost basis accounting methods to calculate losses, which can impact the overall tax outcome. The most common methods are First-In, First-Out (FIFO) and Specific Identification. FIFO assumes the first cryptocurrency acquired is the first sold, while Specific Identification allows taxpayers to choose which specific units are sold. As of January 1, 2025, FIFO and Specific Identification are the only accepted cost basis methods for digital assets; for Specific Identification, assets must be identified at or before sale.

A significant distinction for cryptocurrency taxpayers relates to the “wash sale rule,” outlined in Internal Revenue Code Section 1091. This rule disallows a loss on the sale of a security if a substantially identical security is repurchased within 30 days before or after the sale. However, under current IRS guidance, the wash sale rule does not apply to cryptocurrencies because they are treated as property, not securities. This non-applicability means that a taxpayer can sell cryptocurrency at a loss, claim the deduction, and immediately repurchase the same asset without the loss being disallowed.

Reporting Crypto Losses

Once cryptocurrency losses are calculated, they must be reported to the IRS using specific forms. The main forms for reporting capital gains and losses from cryptocurrency transactions are Form 8949, “Sales and Other Dispositions of Capital Assets,” and Schedule D, “Capital Gains and Losses.” Form 8949 details each individual cryptocurrency transaction that resulted in a capital gain or loss.

On Form 8949, taxpayers must list transaction details, including the date of acquisition, date of sale, cost basis, and sale proceeds for each disposition. These transactions are categorized as short-term or long-term based on the holding period. After all individual transactions are reported on Form 8949, the net short-term and long-term capital gains or losses are transferred to Schedule D. Schedule D summarizes all capital gains and losses, which then flows to Form 1040, the U.S. Individual Income Tax Return.