Can you write off crypto losses on your taxes?

This story is part of Taxes 2023CNET’s coverage of the best tax software, tax tips, and everything else you need to file your return and track your refund.

Let’s say 2022 was not the best year for cryptocurrency.

Bitcoin, the most well-known cryptocurrency, took a beating last year, plunging over 60%, with many altcoins posting similar losses. Although the window for documenting crypto losses for the 2022 tax year is now over, knowing a few crypto tax tricks can help you save money if you plan to continue investing in digital coins, stocks or other securities in the years to come.

One technique, known as tax loss harvesting, allows you to claim capital losses you had from cryptocurrency, investments or property on your taxes, to offset tax owed on future years’ gains. When properly documented, capital losses can offset any capital gains you had in the same year, as well as up to $3,000 of taxable income for that year. If your total loss exceeds $3,000, you can carry forward the remaining balance to future years’ tax returns. We like this as it can help lower your taxable income, and potentially your tax bill.

Tax loss harvesting has its caveats. You can only claim capital losses from your crypto when the loss is “realized”, i.e. when you have sold your coins. The tax rate also varies depending on whether you have held a coin for more than a year or not. Still, with last year delivering its fair share of industry scandals, many investors sitting on significant losses may simply want to sell their holdings and move on. If you do, you know you can “harvest” your losses and save some money on taxes in the years to come.

Here’s a little more about how tax loss harvesting works for crypto investors, along with what credentialed experts say you should keep in mind.

Read more: Best Crypto Tax Software

How the IRS classifies and taxes your crypto

The IRS interprets cryptocurrency as property, not a security, said Ryan Losi, CPA and executive vice president of PIASCIK, an accounting firm. “In 2014 and subsequent notices, the IRS has specifically said they will not process [crypto] as a security, but rather as an asset,” Losi said.

When you sell a property or asset for more than you paid, the difference is called a capital gain, and is subject to capital gains tax. This tax rate varies, depending on how long you held the asset. If you held the asset for a year or less, it is a short-term gain and will be taxed at the same rate as your income tax rate.

Source: IRS

In contrast, if you held your assets for more than a year, the IRS calls this capital gain a long-term gain, and will tax you at one of three rates for the 2022 tax year.

• If your taxable income was $41,675 or less, the capital gains tax rate is 0%.
• If your taxable income was between $41,676 and $459,750, the rate is 15%.
• If your taxable income was more than $459,750, the rate is 20%.

The IRS lists certain exceptions where the rates are higher, but none of them currently apply to cryptocurrency.

Then there is course loss. If you sell an asset for less than you paid for it, it is considered a capital loss. Many people who have held bitcoin since early last year are probably sitting on a significant capital loss at the moment. When you sell your crypto at a loss, it can be used to offset other capital gains in the current tax year, and potentially in future years as well. If your capital losses are greater than your gains, up to $3,000 of them can be deducted from your taxable income ($1,500 if married, filing separately). In addition, any unused losses after that can be carried forward and added to a future year’s tax return.

With me so far? Realizing a loss can give you tax relief. This is tax loss harvesting in a nutshell, and some investors do it strategically to secure future gains.

Can you sell coins, claim the loss and then buy them back?

Technically, yes. This is a benefit of the IRS classifying crypto as a property instead of a stock.

The IRS’s wash sale rule states that if investors sell a security at a loss, and then buy a “substantially identical” security within 30 days of the sale, they cannot claim those losses as capital losses on their taxes. Think of this as the IRS’s way of discouraging tons of transactions (and subsequent market volatility) from people trying to game the taking process for tax losses.

However, cryptocurrencies are not subject to the wash sale rule at the time of writing. “If their definition is later expanded by Congress, then OK, but until then, crypto is not considered a security,” Losi said. Remember that you cannot claim a capital loss until it is realised; If you are currently marinating in the crypto dip, selling your coins and then repurchasing them at a later date is technically within the limit and will allow you to realize the loss for tax purposes.

The technique is valuable enough that some cryptocurrency software companies offer a way to automate tax loss reporting, said Christian Rivera, CPA and founder of The Ecommerce Accountants, an accounting firm. “What some investors do is use software tools like TaxBit to track what’s called your basis in your investments. These are your realized gains or losses. If you have realized gains but also have losses that haven’t been realized yet, [the software can] trigger those trades so that you take losses and avoid being stuck in a huge taxable position,” Rivera said.

Consult a tax professional if you plan to implement a tax loss strategy on a regular basis.

How to claim crypto losses on your taxes

When claiming crypto losses, you must first document whether they were short-term or long-term losses on Form 8949. The type of loss will matter if you also have capital gains in the same tax year, said Eric Bronnenkant, CPA and chief tax officer at Betterment, a financial advisory firm. “If your gains exceed your losses, the nature of your loss can have an impact on the net tax you pay,” Bronnenkant said. In addition, the type of loss will matter if you plan to carry the loss forward to future tax years.

Form 8949 is then included on Schedule D, which calculates total net capital gain or loss. You will then attach Schedule D to your Form 1040. If you use a cryptocurrency exchange, be sure to check and see if they have distributed a form to you, such as a 1099-MISC, so you can match numbers.

If you’re using tax software to file your taxes this year, you know you may have to pay for a higher level of service to report cryptocurrency activity.

Read more: Best Tax Software for 2023

Turn your crypto losses into a tax break

Cryptocurrency continues to endure regulatory scrutiny and a volatile market. Know the ropes when it comes to claiming capital losses, and you’ll be better prepared to save money when you file your taxes.

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