How are taxpayers meant to report crypto losses on their federal tax returns? Disclosure of crypto gains and/or losses is required by the Internal Revenue Service. Failure to do so may result in a potential audit or worse.
It’s never wise to be ignorant of IRS rules for any investment but where cryptocurrency is concerned what you do not know can definitely hurt you. Don’t take the risk where any investment is concerned–you want to be as transparent as possible about your cryptocurrency holdings, purchases, and divestment.
What follows is not tax advice. Consider this article as a primer that can help you ask questions of a tax professional to prepare you to review relevant material at the IRS official site.
Furthermore, this article ONLY discusses the reporting of cryptocurrency losses on federal tax forms as it applies to crypto that is not held for business purposes or to earn a profit. There are business uses and tax laws regarding cryptocurrency, but this article does not address such “business-to-business” crypto transactions.
Report Crypto Losses On Your Federal Taxes
You are required by law to report crypto gains on your federal tax returns–many reading this might already know or just assume that is true. But the reverse is ALSO true. You are required to report your losses as well as your gains.
Cryptocurrency is not treated as cash or income by the IRS. Instead, it is regarded as property or an asset and as such is subject to the tax laws for capital gains and losses.
The IRS has a special form to do this, but it’s not a cryptocurrency tax form per se, it’s the tax document you use to report the sale and “other disposition” of capital assets which can include but are not limited to crypto.
You will see other cryptocurrency sites refer to IRS Form 8949 as a cryptocurrency tax form. This is not accurate as the form is not restricted to crypto as mentioned above and searching for “crypto tax form” on the IRS official site at press time reveals NO SEARCH RESULTS.
Instead, search for “Sales and Other Dispositions of Capital Assets” and/or IRS Form 8949. You can also get the fillable PDF directly from the IRS official site.
How To Report Crypto Losses
Any “taxable event” related to crypto must be reported to the IRS on an IRS 8949 cryptocurrency tax form, similar to the sale of stock. Typical taxable events can include:
- Selling crypto
- Trading crypto
- Paying with cryptocurrency
- Paying with crypto via a crypto debit card
If you provide a service and receive crypto in exchange, even as a freelancer or independent contractor, you are earning income even though the IRS views crypto as property. That is something to keep in mind when deciding how to report your capital gains and losses each year to the IRS.
When filing with IRS Form 8949, you will be asked to describe the asset (in this case, your virtual currency), the date you got it, the price at the time, the price of the currency when you sold, traded or spent it, and you’ll need to record the profit or loss accordingly.
All of this information may also be included on a Form 1040 Schedule D form, which is used to report the sale or disposition of capital assets (like crypto) that are not held for business purposes. And it is very important to know that if you have a tax liability associated with mining cryptocurrency, this income is treated as “ordinary income” and must be reported as such.
Deliberately Taking A Crypto Loss
Some investors treat cryptocurrency as a sort of stop-loss strategy against an anticipated federal tax bill. If you have capital gains in other areas and you decide to sell crypto at a loss, for example, that loss may offset the capital gains in other areas making your investment in crypto more nuanced and complex than the standard enthusiast’s–at least potentially.
Crypto tax-loss harvesting is a concept that (outside virtual currency) is very old–selling one asset at a loss to offset the gains from another to offset a large tax bill. But with this more nuanced strategy, some attention to detail is required–you should pay strict attention to how long you have owned the assets you want to sell–you can only offset “like with like”.
In this case, that means you cannot use a short-term capital loss to offset a long-term capital gain, and vice-versa. You may only use a short-term capital loss to offset a different short-term gain in the initial report of loss.
Short-Term Versus Long-Term Net Capital Gains And Losses
In light of the above, what do crypto investors need to know about the difference between a short-term and long-term capital loss?
According to IRS.gov, any crypto held for a year or LESS is reported accordingly as a short-term capital gain or loss. Those who have had a gain or loss on crypto they held for more than one year will report those as long-term. The clock begins ticking on these investments the day AFTER you acquire them so be mindful about the dates you got your crypto as well as the dates you sold or transferred it.
Annual Capital Gains Loss Limits
There is an annual cap on the dollar amount of net capital losses you can claim in any given tax year–see the IRS official site to learn the current year’s cap, which is subject to change depending on the tax year, IRS regulations, changes in federal law, etc.
Some sources report that you may, depending on circumstances, be able to carry the excess losses above and beyond the annual limit into the next tax year and claim another deduction. Ask a tax professional how that may be accomplished and what you need in order to report that loss successfully.
I Didn’t Get A Tax Form For My Crypto Losses
The Internal Revenue Service expects citizens to report their capital gains and losses alike, but if your crypto exchange does not bother to do so, are you off the hook as a taxpayer?
Absolutely not. Some sources report an increase in IRS audits aimed at those who invest in crypto but do not report it on IRS Form 8949. Did you know the IRS has employees focused on pursuing cryptocurrency tax scofflaws? There is a serious risk of being audited if you have crypto gains or losses and don’t report them accordingly.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.