Can you write off crypto losses on your taxes?

This story is part of it Taxes 2023CNET’s coverage of the best tax software, tax advice, and everything else you need to file your return and track your refund.

Let’s just say that 2022 was not the best year for cryptocurrencies.

Bitcoin, the best-known cryptocurrency, took a hit last year, plummeting more than 60%, with many altcoins experiencing similar losses. Although the time window for documenting crypto losses for the 2022 tax year has now passed, knowing a few crypto tax tricks can help you save money if you plan to continue investing in cryptocurrencies, stocks or other securities in the years to come. .

A technique known as tax loss harvesting allows you to claim capital losses you’ve had from cryptocurrencies, investments or real estate on your taxes in order to offset taxes owed on future years’ profits. When properly documented, capital losses can offset any capital gains income you had in the same year, as well as up to $3,000 of taxable income for that year. If your total losses exceed $3,000, you can carry the balance forward to future years’ tax returns. We like it because it can help reduce your taxable income and potentially your tax bill.

Tax loss harvesting has its caveats. You can only claim capital losses from your crypto after the loss is “realized”, meaning once you sell your coins. The tax rate also varies depending on whether or not you hold a coin for more than a year. Still, with the past year delivering its share scandals in the industry, many investors who take significant losses may simply want to sell their holdings and move on. If you do, know that you could ‘harvest’ your losses and save money on taxes for years to come.

Here’s a little more about how tax loss harvesting works for crypto investors, along with what accredited experts say you should be aware of.

Read more: Best Crypto Tax Software

How the IRS Classifies and Taxes Your Crypto

The IRS interprets cryptocurrencies as property, not security, said Ryan Losi, CPA and executive vice president at PIASCIK, an accounting firm. “In 2014 and subsequent announcements, the IRS specifically said not to cure [crypto] as security, but rather as property,” Losey said.

When you sell a property or asset for more than you paid, the difference is called a capital gain and is subject to capital gains tax. This tax rate varies, depending on how long you have held the asset. If you held the asset for a year or less, this is a short-term gain and will be taxed at your income tax rate.

Source: IRS

Conversely, if you held your assets for more than a year, the IRS calls that capital gain a long-term gain and will tax you at one of three rates for the 2022 tax year.

• If your taxable income was $41,675 or less, the capital gains tax rate is 0%.
• If your taxable income was between $41,676 and $459,750, the rate is 15%.
• If your taxable income was more than $459,750, the rate is 20%.

The IRS lists some exceptions where the rates are higher, but none of them currently apply to cryptocurrencies.

Then there are capital losses. If you sell an asset for less than what you paid for it, it is considered a capital loss. Many people who have owned bitcoins since the beginning of last year are likely to have a significant capital loss right now. When you sell your crypto at a loss, it can be used to offset other capital gains in the current tax year, and potentially in future years as well. If your capital losses are greater than your gains, up to $3,000 of them can be deducted from your taxable income ($1,500 if married, filing separately). Additionally, any unapplied losses after that can be carried forward and applied to the following year’s tax return.

With me so far? When you realize a loss, it can give you a tax break. It’s about tax loss harvesting in a nutshell and some investors do it strategically to safeguard their future profits.

Can you sell coins, claim the loss and then buy them right back?

Technically yes. This is an advantage to the IRS classifying crypto as property rather than stock.

The IRS wash sale rule states that if investors sell a security at a loss and then buy a “substantially identical” security within 30 days of the sale, they cannot claim those losses as capital losses on their taxes. Think of it as the IRS’s way of discouraging tons of trading (and the resulting market volatility) from people trying to game the tax loss collection process.

Cryptocurrencies, however, are not subject to the wash sale rule as of this writing. “If their definition is expanded later by Congress, then fine, but until then, encryption is not considered security,” Losi said. Remember, you cannot claim a capital loss until it is realised. If you are currently marinating in the crypto style, selling your coins and then buying them back at a later date is technically within the limits for now and will allow you to realize the loss for tax purposes.

The technique is valuable enough that some cryptocurrency software companies offer a way to automate the collection of tax losses, said Christian Rivera, CPA and founder of accounting firm The Ecommerce Accountants. “What some investors do is use software tools like TaxBit to track what’s called your basis in your investments. That’s your realized gains or losses. If you’ve made gains, but you’ve also got losses that haven’t yet been realized, [the software can] trigger those trades so you can cash out the losses and avoid getting stuck in a huge taxable position,” Rivera said.

Consult a tax professional if you plan to implement a tax loss harvesting strategy on a regular basis.

How to claim crypto losses on your taxes

When claiming crypto losses, you should first document whether they were short-term or long-term losses on Form 8949. The type of loss will matter if you also have capital gains in the same tax year, said Eric Bronnenkant. CPA and Head of Tax at Betterment, a financial advisory firm. “If your gains exceed your losses, the nature of your loss can have an impact on the net tax you pay,” Bronnenkant said. Additionally, the type of loss will matter if you intend to carry the loss forward into future tax years.

Form 8949 is then included in Schedule D, which calculates the total net capital gain or loss. You will then attach Schedule D to your Form 1040. If you are using a cryptocurrency exchange, be sure to check and see if they have distributed a form, such as a 1099-MISC, so you can match the numbers.

If you are using tax software to file your taxes this year, be aware that you may need to pay for a higher level of service in order to report cryptocurrency activity.

Read more: The best tax software for 2023

Turn your crypto losses into a tax deduction

Cryptocurrencies continue to undergo regulatory scrutiny and a volatile market. Know the ropes when it comes to claiming capital losses and you’ll be better prepared to save money when you file your taxes.

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