If you’re one of the many people who invested in cryptocurrency, you’re probably aware of the risks involved. The volatile nature of the market means that you could lose money just as quickly as you make it.
However, what many people don’t consider is the tax implications of crypto losses.
If you’ve invested in cryptocurrency and lost money, you may be able to deduct your losses from the profits you made during the year. However, there are several factors that could affect how much tax relief you receive.
Are Crypto Losses Tax Deductible?
The short answer is yes, crypto losses are tax deductible. However, there are a few things you should know before you start deducting your losses. First, you can only deduct losses against capital gains. This means that if you haven’t sold any assets that have increased in value, you won’t be able to deduct your crypto losses.
Additionally, you can only deduct up to $3,000 in losses per year. If your losses exceed that amount, you can carry them over to future tax years. This is called a capital loss carryover.
Finally, you can only deduct losses against your own personal income. If you earned money through an LLC or a corporation, those earnings are separate from your personal income and cannot be used to offset your losses.
Cryptocurrency Losses: How to Claim Them on Your Taxes
Now that you know that crypto losses are tax-deductible, you need to know how to claim them on your taxes. First, you’ll need to determine how much you’ve lost. This can be tricky since the value of cryptocurrencies can change rapidly.
One way to determine your losses is to use cryptocurrency tax software. These programs can help you track your investments and calculate your losses. Some popular options include CoinTracker and Blockfolio.
CoinTracker and Blockfolio are two free cryptocurrency portfolio trackers that are simple to use.
After you’ve determined how much money you have lost in your crypto investments, report it on your taxes by filling out Form 8949 and attaching it to your 1040.
The form requires you to report each individual cryptocurrency sale, including the date and time of your purchase or exchange, what it was purchased or exchanged for (the “cost basis”), how much money was made or lost on the transaction ((its) selling price), and whether any gain was reported.
Do You Have to Report Crypto Losses?
Yes, you must report your cryptocurrency gains or losses on your tax return. Failure to do so could result in penalties and interest charges. The IRS considers cryptocurrencies to be property—like stocks or real estate holdings—and taxes them accordingly.
The IRS is cracking down on cryptocurrency tax evasion. In 2019, the agency sent warning letters to more than 10,000 taxpayers who may have failed to report cryptocurrency transactions.
So it’s important that you accurately report your losses and avoid any penalties for non-compliance.
Understanding the tax implications
Investing in cryptocurrency can be exciting, but it’s important to understand the tax implications of your investments. If you’ve experienced crypto losses, remember that they are tax deductible up to $3,000 per year. To claim your losses, you’ll need to determine how much you’ve lost and report them on IRS Form 8949. And, of course, don’t forget to report your losses accurately to avoid penalties and interest from the IRS.
If you made money on your cryptocurrency investments, remember that the taxable amount is determined by taking your cost basis and subtracting any capital gains or losses. If you sold a cryptocurrency for more than its purchase price, then you have a capital gain. If you sold it for less than its purchase price, then you have a loss.