Crypto Losses on Taxes
The cryptocurrency and NFT (non-fungible token) booms pushed markets to dizzying highs and devastating lows. What was once seen as a stellar investment now appears to be on the decline, and some people are considering getting out of the crypto market entirely. Selling at a loss, however, is an unpleasant prospect. As such, crypto investors may find themselves wondering if they can write off crypto losses on taxes. The answer, luckily, is yes. Losses on cryptocurrency and NFTs can be written off either to offset capital gains or deduct up to $3,000 from one’s yearly income tax.
When Can You Write Off Losses?
At present, the IRS treats cryptocurrency and NFT, collectively referred to as “crypto,” as property, the same as any other stock. As such, the value of a cryptocurrency is only realized—and therefore only taxable—after the crypto is sold, traded, or spent. To write off crypto losses on taxes, a particular coin or NFT must be sold, traded, or spent at a loss. Merely holding crypto that has decreased in value does not allow for tax write offs. Nor does selling the currency at a loss and buying it back: this tactic is considered a ‘wash sale’ by the IRS and unfavorably looked upon. For additional information on cryptocurrency and NFTs, visit the RJS LAW Blog.
How Do You Write off Crypto Losses on Taxes?
After realizing a loss on a particular crypto asset by selling, trading, or purchasing something with the crypto, you will list that transaction on your taxes using Form 8949 Sales and Other Dispositions of Capital Assets and Form 1040, Schedule D. If the currency was mined or minted, this should be disclosed either on Schedule C (for businesses) or Schedule 1 (for hobbyists).
These forms will all require you to list the basis, or initial price, of your crypto. A typical transaction for an NFT may look something like this:
- Use United States Dollars (USD) to buy 1 Ethereum (ETH) at $1,500 plus a $5 transaction fee,
- Buy an NFT for 1 ETH immediately,
- At some point later, sell the NFT for .5 ETH
- Convert the .5 ETH back to USD. ETH is now trading at $1000.
The bases to be accounted for are the initial price of the ETH, the initial price of the NFT, and the price of ETH when the NFT was sold. Each transaction is considered a taxable event, so any loss of value may therefore be written off. Assuming the ETH transactions took place directly before and after the sale of the NFT, it is likely that the purchase of the NFT and the final conversion of ETH to USD will be considered capital gains (because an asset was sold or exchanged for profit) and the sale of the NFT will be considered a loss.
Once you have calculated your basis, you can determine if you are able to claim crypto losses on taxes. If you still made some profits, as in the scenario above, you could use the loss to offset capital gains. You may also use losses in crypto to offset other capital gains. If your general capital losses outstripped your gains, you may use the losses to write off up to $3,000 per year of personal income. If your losses are greater than $3,000, the amount may be carried over and applied to subsequent tax years.
Taking losses on an investment is never fun. Luckily losses in crypto, like those in other investments, may be written off. If you have questions on how to write off crypto losses on taxes, RJS Law provides Tax Planning services which can help individuals and businesses navigate the complexities of both the Internal Revenue Code and local tax laws. Contact RJS LAW online or at 619-595-1655 to arrange a free consultation.
Written by Zachary K. McDaniel