Can You Write Off Bitcoin Losses on Your Taxes?

Cryptocurrency has transitioned from a niche interest to a significant component of the financial landscape. As these digital assets, including Bitcoin, grow in personal finance, understanding the tax implications, particularly concerning investment losses, becomes increasingly relevant. The Internal Revenue Service (IRS) has established guidelines for reporting these digital asset transactions, which are crucial for navigating tax obligations.

How Cryptocurrency is Taxed

For U.S. federal tax purposes, the IRS classifies cryptocurrency as property, rather than currency. This means general tax principles applicable to property transactions also apply to cryptocurrency activities. Engaging in transactions such as selling, exchanging, or using cryptocurrency to purchase goods or services can trigger a taxable event.

A key concept is “cost basis,” which is the original purchase price including any associated fees. When you dispose of cryptocurrency, this cost basis is subtracted from the sale price to determine a capital gain or loss. Maintaining accurate records of your cost basis is essential for correct tax reporting.

Realizing Investment Losses

An investment loss in cryptocurrency is “realized” when a specific disposition event occurs, not merely when the market value of your holdings declines. Simply holding cryptocurrency that has decreased in value does not create a deductible loss; the loss must be locked in through a transaction. Common disposition events that trigger a realized loss include selling cryptocurrency for fiat currency (like U.S. dollars) for less than its adjusted basis. Exchanging one cryptocurrency for another when the value received is less than the basis of the crypto given up also constitutes a realized loss. Using cryptocurrency to pay for goods or services at a value below its cost basis can also result in a realized loss.

Limits on Loss Deductions

Cryptocurrency losses are treated as capital losses, similar to losses from stocks or bonds. These capital losses can be used to offset capital gains from other investments, including other cryptocurrency sales or traditional securities. After offsetting all capital gains, if a net capital loss remains, individual taxpayers can deduct up to $3,000 against their ordinary income each year. For those married filing separately, this annual deduction limit is $1,500.

Any net capital losses exceeding the annual $3,000 (or $1,500) limit can be carried forward indefinitely to future tax years. These carried-forward losses can then be used to offset capital gains in subsequent years and, if a net loss still remains, up to $3,000 against ordinary income in those future years.

A distinction for cryptocurrency investors is the current non-application of the wash sale rule. This rule, which applies to stocks and securities, prohibits deducting a loss if you sell an asset and repurchase a “substantially identical” one within 30 days. Since the IRS classifies cryptocurrency as property, not securities, the wash sale rule does not currently apply to crypto transactions. This means you can sell cryptocurrency at a loss and immediately buy it back, potentially allowing for tax loss harvesting without the 30-day waiting period. However, the regulatory landscape is subject to change, and waiting at least 30 days before rebuying can offer protection against potential future rule changes or challenges.

Information Needed to Report Losses

Accurately reporting cryptocurrency losses requires meticulous record-keeping. Taxpayers need to gather specific information for each transaction, including:
The date the cryptocurrency was acquired and disposed of.
The cost basis (original purchase price plus any acquisition fees).
The sales proceeds (amount the cryptocurrency was sold or exchanged for).
Any transaction fees associated with both the acquisition and disposition.

These details are reported on IRS Form 8949, “Sales and Other Dispositions of Capital Assets.” The totals from Form 8949 are then summarized on Schedule D (Form 1040), “Capital Gains and Losses,” which calculates your overall net capital gain or loss. Taxpayers should maintain detailed records from exchanges or personal transaction logs to support these calculations.

Submitting Your Tax Information

After compiling transaction details and completing tax forms, submit your tax return to the IRS. Taxpayers have several methods for filing their federal income tax return. These include e-filing through tax preparation software, utilizing a tax professional, or mailing paper forms directly to the IRS.

E-filing offers advantages such as faster processing and immediate confirmation of submission. Many tax software programs and tax professionals are equipped to handle cryptocurrency reporting, integrating data from your transaction records into the appropriate forms.

Regardless of the submission method chosen, ensure all required forms, including Form 8949 and Schedule D, are attached and accurately reflect your cryptocurrency activities. Upon submission, taxpayers receive a confirmation of filing. In some cases, the IRS may issue inquiries if further clarification or documentation is needed.