How to handle cryptocurrency losses on your 2022 tax return
- The digital currency industry lost nearly $1.4 trillion in 2022 after a series of bankruptcies and liquidity problems.
- Experts cover what you should know about claiming crypto losses on your 2022 tax return.
A worsening macroeconomic climate and the collapse of industry giants such as FTX and Terra have weighed on bitcoin’s price this year.
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One of the benefits of declining assets is the ability to take advantage of tax-loss harvesting, or using losses to offset gains.
If you sold crypto at a loss, you can deduct it from other portfolio gains, and when losses exceed gains, you can trim up to $3,000 from ordinary income, explained Lisa Greene-Lewis, a certified public accountant and tax expert with TurboTax.
Additionally, there is currently no “wash sale” rule for crypto. The rule blocks the tax relief if you buy a “substantially identical” asset 30 days before or after the sale.
You calculate your loss by subtracting the sales price from the original purchase price, known as “basis,” and report the loss on Form D and Form 8949 on your tax return.
If your crypto losses exceed other investment gains and $3,000 of ordinary income, you can use the rest in subsequent years, Greene-Lewis said. But it is easy to lose track of carried forward losses and miss future opportunities to lower taxes, she warned.
With multiple crypto exchanges and platform collapses in 2022, you may have lingering questions about tax loss reporting this season.
CPA and tax attorney Andrew Gordon, president of the Gordon Law Group, said there are usually two concerns: possibly claiming losses for non-deposits and reporting income from rewards or interest.
It might make sense to file an extension if you had significant holdings on any of these platforms to see if there is further clarity.
Andrew Gordon
President of the Gordon Law Group
In some cases, you can claim a capital loss, or bad debt deduction, and write off what you spent on the asset. But it must be a “complete loss” to claim it, Gordon said. If you end up getting, say, 10% back after claiming a bad debt deduction, that 10% becomes regular income.
Although there are more options for 2022, he usually tells customers to “wait and see” what happens. “It might make sense to file an extension if you had significant holdings in any of these platforms to see if there is further clarity,” he said.
Since 2019, the IRS has included a yes-or-no question about crypto on the front of the tax return. The agency has also pursued customer records by sending court orders to several exchanges.
“The IRS has over five years of information on taxpayers,” Losi said, so if they find out you have crypto and you haven’t reported, you could be targeted, he said.
