Have you lost money on a cryptocurrency trade this year? We’ll go over everything you need to know about cryptocurrency capital losses in this guide. We’ll dispel some common myths and explain how to report capital losses on your tax return.
Can you deduct cryptocurrency losses on your taxes?
Yes. The IRS considers cryptocurrencies such as bitcoin to be property and subject to capital gains and losses rules.
This means that if you lose money after trading, selling, or otherwise disposing of your cryptocurrency, your losses will offset your capital gains and up to $3000 in personal income. Net losses in excess of $3000 can be carried forward to future tax years.
How crypto losses compensate for capital gains?
Capital losses can also be used to offset an unlimited amount of your annual capital gains which can be calculated by the best crypto tax softwares.
Do capital losses compensate for either short-term or long-term capital gains?
In the United States, cryptocurrency is taxed at a lower rate when sold after a 12-month holding period.
It is critical to remember that short-term capital losses offset short-term capital gains first, and long-term capital losses offset long-term crypto capital gains tax first. If you have any remaining net capital losses, they can be used to offset capital gains of the other type.
Is it possible to claim a capital loss if you haven’t sold your cryptocurrency?
Remember that you must actually realize your loss in order for it to qualify as a capital loss that can be deducted from your taxes. To realize a loss, you must have a taxable event—that is, you must actually dispose of your cryptocurrency.
The following are some examples of disposals:
- Trading or selling cryptocurrency in exchange for fiat currency (like USD)
- Trading one cryptocurrency for another
- Using cryptocurrency to purchase a product or service
- That means you won’t be able to deduct any losses if you’re just holding your cryptocurrency. Only after a taxable event occurs will you be able to report your losses.
Explanation of unrealized losses
Unrealized loss occurs when your cryptocurrency is worth less than when you received it and you have not sold it. Let’s look at an example to better understand this concept.
What if I earned cryptocurrency and the price fell?
Cryptocurrency earned through mining and staking is taxed as personal income at its fair market value at the time of receipt. Even if the fair market value of your cryptocurrency falls, this remains true.
If you keep your cryptocurrency earnings, it will be considered an unrealized loss. If you decide to sell, you can claim a capital loss based on how much the value of your cryptocurrency income has dropped since you first received it.
Is it incessant to report cryptocurrency losses to the IRS?
Yes, you must report cryptocurrency losses on IRS Form 8949. Many investors believe that if they only have losses and no gains, they are not required to report this to the IRS. This is not correct, and the IRS explicitly states that cryptocurrency losses must be reported on your tax return.
Calculate your gain or loss from the transaction and record it on one line of Form 8949 to report your taxable events. After you’ve completed the lines for each of your taxable events, add them all up and enter your total net gain or loss at the bottom of Form 8949. (pictured below).
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