Can You Deduct Crypto Losses on Your Taxes?

Cryptocurrency investments can be unpredictable, with prices swinging dramatically. If you’ve lost money on crypto, you might wonder if those losses can reduce your tax bill. The answer depends on the type of loss and how it occurred.

Tax rules for crypto losses vary depending on whether they stem from selling at a loss, theft, or assets becoming worthless. Understanding how these losses apply to your taxes can help you offset gains from other investments and minimize what you owe.

Qualifying Losses for Deduction

Not all cryptocurrency losses can be deducted. The IRS distinguishes between capital losses from sales, theft-related losses, and assets that have become worthless. Losses from selling at a lower price than you paid can be written off, while losing access to a wallet or falling victim to a scam generally does not qualify under current tax laws.

Capital Losses from Sales or Trades

Selling or trading cryptocurrency for less than you originally paid results in a capital loss, which can offset capital gains from other investments. If your losses exceed your gains, you can deduct up to $3,000 per year against other income, with any remaining losses carried forward to future tax years.

For example, if you bought Bitcoin for $10,000 and later sold it for $7,000, you would have a $3,000 capital loss. If you also had $5,000 in stock market gains that year, you could use the crypto loss to reduce your taxable gains to $2,000. If you had no gains, you could deduct $3,000 from your regular income and carry forward any remaining losses.

The IRS requires each crypto transaction to be reported individually, making detailed records essential. This includes purchase dates, sales prices, and transaction fees. Losses from personal use, such as spending crypto on a purchase where the value dropped, do not qualify.

Theft or Hack-Related Losses

Before 2017, losses from theft, scams, or exchange hacks could be deducted as casualty losses. However, the Tax Cuts and Jobs Act (TCJA) changed the rules, and personal losses from theft or fraud are no longer deductible. If your crypto was stolen in a phishing attack or lost due to an exchange hack, you likely cannot claim a deduction.

If the loss occurred in a business setting—such as a company holding crypto as part of its operations—it may be classified as a business loss. Businesses may be able to write off stolen assets as an ordinary loss on their tax return.

Some investors have argued that stolen crypto should be treated as a capital loss rather than a theft loss, but the IRS has not explicitly supported this interpretation. If you experience a significant loss due to theft, consulting a tax professional may help determine if any deductions are possible.

Abandoned or Worthless Assets

If a cryptocurrency becomes worthless due to a project shutting down, regulatory bans, or developers abandoning it, you may be able to claim a worthless investment deduction. The IRS allows taxpayers to treat an asset as sold for $0 if it has no remaining value, enabling them to recognize a capital loss.

For example, if you purchased tokens in a project that collapsed due to fraud or financial failure, you may be able to claim the full amount you invested as a loss. However, proving that an asset is truly worthless can be difficult. The IRS typically requires evidence such as delisting from exchanges, statements from developers, or significant legal action against the project.

Unlike regular capital losses, worthless securities can be written off without a sale if they meet IRS guidelines under Section 165 of the tax code. If you suspect a crypto investment has become worthless, document its decline and seek guidance on how to claim the loss correctly.

Documenting Transactions

Tracking cryptocurrency transactions is necessary for tax compliance and substantiating any claimed losses. Since digital assets are treated as property, maintaining thorough records helps establish cost basis, holding periods, and fair market values. Without proper documentation, the IRS may disallow deductions, leading to penalties or audits.

Transaction records should include purchase and sale dates, the amount of cryptocurrency involved, the value in U.S. dollars at the time of the transaction, and any associated fees. Exchanges typically provide transaction histories, but these may be incomplete, especially if assets were transferred between wallets or used in decentralized finance (DeFi) platforms. Crypto portfolio tracking software or blockchain explorers can help fill in gaps.

For transactions outside centralized exchanges, such as peer-to-peer trades or decentralized swaps, additional documentation may be needed. Screenshots of transaction confirmations, blockchain transaction IDs, and correspondence with counterparties can serve as supporting evidence. If cryptocurrency was received as income—whether through mining, staking, or as payment for services—records should also include the fair market value at the time of receipt.

If a cryptocurrency becomes worthless or is abandoned, retaining proof is necessary. This could include official announcements from project developers, news reports of insolvency, or evidence of delisting from major exchanges. If an asset is no longer accessible due to lost private keys, demonstrating attempts to recover the funds—such as correspondence with wallet providers or forensic analysis—may support a claim of economic loss.

Reporting on Tax Filings

Cryptocurrency transactions must be reported accurately to avoid penalties or audits. The IRS requires individuals to disclose digital asset activity on Form 1040 by answering whether they received, sold, or otherwise disposed of crypto during the tax year. If taxable events occurred, additional reporting through Form 8949 and Schedule D is necessary to account for gains and losses.

Form 8949 details each transaction, including acquisition and disposal dates, cost basis, and proceeds. Transactions are categorized based on holding periods: short-term for assets held one year or less and long-term for those held beyond 12 months. Short-term gains are taxed as ordinary income, while long-term gains benefit from lower capital gains tax rates of 0%, 15%, or 20%, depending on taxable income.

If cryptocurrency was earned through activities like mining, staking, or receiving payments, it must be reported as ordinary income on Schedule 1 or Schedule C, depending on whether it was earned as a hobby or business. Self-employed individuals must also pay self-employment tax, which includes Social Security and Medicare contributions. The fair market value of received crypto at the time of acquisition determines the taxable amount, and any subsequent sale or exchange triggers a separate capital gain or loss event.

Offsetting Gains with Losses

Managing capital gains and losses can impact an investor’s tax liability. The IRS allows taxpayers to offset capital gains with capital losses, reducing the taxable portion of investment earnings. This strategy, known as tax-loss harvesting, lets investors minimize their tax burden by realizing losses in a given year to counterbalance gains from other assets.

Short-term losses must first be used to offset short-term gains, while long-term losses apply to long-term gains. Since short-term gains are taxed at higher ordinary income rates, prioritizing short-term losses can provide greater tax savings. If total losses exceed total gains, up to $3,000 can be deducted against ordinary income, with any remaining losses carried forward indefinitely under Internal Revenue Code Section 1211(b).

Frequent traders should be mindful of the wash sale rule under IRS Regulation 1.1091-1, which disallows a loss deduction if substantially identical securities are repurchased within 30 days before or after selling at a loss. While this rule explicitly applies to stocks and securities, the IRS has not issued definitive guidance on its application to cryptocurrencies, creating uncertainty for digital asset investors.

When to Consult a Tax Professional

Cryptocurrency tax rules can be complex, especially for large losses, uncertain classifications, or multi-year carryforwards. While many investors can handle straightforward capital loss deductions, certain situations warrant professional guidance to ensure compliance and maximize potential tax benefits.

Tax professionals can assist with high-frequency trading, DeFi transactions, or assets acquired through non-traditional means such as airdrops or forks. These scenarios often introduce complications related to cost basis allocation and reporting requirements. Additionally, if an investor has unreported crypto transactions from previous years, a tax expert can help with voluntary disclosure options to mitigate penalties. Businesses holding digital assets may also require specialized accounting strategies to classify losses correctly under Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).