Lost money on crypto in 2022? Here’s how it could affect your tax return

You may be able to profit financially from that situation.

Investing in cryptocurrency is not for the faint of heart. As volatile as the stock market can be, the crypto market can be even more volatile. And last year it certainly saw its share of fluctuations. So if you lost money on crypto in 2022, you might be in good company.

Of course, losing money on an investment is never a big deal, as it is the opposite of what you are trying to achieve by putting your money to work. But if you took an actual loss on crypto in 2022, you might be able to use it to your advantage when you file your taxes this year.

A tough year for investors overall

It’s fair to say that 2022 was a rocky one for investors by and large. Not only did stock values ​​fall, but crypto absolutely plummeted. In fact, it’s estimated that Bitcoin alone lost over 60% of its value in 2022, so if it’s an asset you held, it may have affected you.

Now one thing you should know is that any time you take a loss on an investment, it can serve as a tax break. So, for example, if you lost $5,000 in crypto in 2022, you can use that $5,000 loss to offset capital gains. And if you don’t have the full $5,000 in capital gains, you can use some of that loss to offset your ordinary income.

To be clear, however, you can only claim a capital loss on your taxes if you actually went and sold off assets for less than what you paid for them. So let’s say you bought shares in your brokerage account for $4,000 that you sold for $3,000. That means you can claim a $1,000 loss. But if the value of those shares fell to $3,000, but you haven’t sold them, you’re not looking at an actual loss – and so there’s no tax relief to be had.

The same goes for crypto. Maybe your portfolio is significantly down because of the hit the crypto market took in 2022. But if you didn’t sell your digital currencies at a lower price than what you paid for them, you won’t be eligible to claim losses.

To put it another way, the IRS just lets you claim actual loss on taxes, not hypothetical. But if you didn’t sell your assets when they were down, your portfolio could still recover. So you cannot claim a loss in that scenario.

Know the rules

Writing off capital losses can serve as a huge tax break. But it is important to do it with accuracy. That’s why it’s a good idea to engage a tax professional when dealing with capital losses. They can help you navigate the rules and make sure you take advantage of the tax breaks available to you. They can also help to ensure that you do not accidentally claim tax relief to which you are not entitled.