How to Declare Crypto Losses on Taxes in USA

Taxes February 01, 2025
How to Declare Crypto Losses on Taxes in USA

Introduction

Cryptocurrency investments come with high volatility, often leading to significant losses alongside gains. In the U.S., properly reporting crypto losses can reduce tax liabilities and help traders optimize deductions under IRS guidelines.

This guide explains how crypto losses are classified, how to report them, and tax-saving strategies like tax-loss harvesting and capital loss carryovers.

 

Understanding Cryptocurrency Losses

The IRS classifies cryptocurrency as property, meaning any loss from selling, trading, or disposing of crypto is treated as a capital loss.


Types of Crypto Losses

Capital Losses

  • When cryptocurrency is sold, traded, or disposed of for less than its original purchase price, the difference is considered a capital loss.
  • These losses can be used to offset capital gains, reducing overall tax liability.

Business Losses

  • If trading is classified as a business, crypto losses can be fully deducted against other business income.
  • Professional traders who qualify for Trader Tax Status (TTS) may deduct additional trading expenses.

Theft or Fraud Losses

  • If cryptocurrency is lost due to hacking, theft, or exchange failure, it may not be deductible under IRS rules.
  • Since 2018, personal casualty and theft losses are no longer deductible unless associated with a federally declared disaster.


Tax Treatment of Crypto Losses

Offsetting Capital Gains

  • Capital losses can offset capital gains from crypto, stocks, real estate, or other investments.
  • If capital losses exceed capital gains, the IRS allows individuals to deduct up to $3,000 per year ($1,500 if married filing separately) against ordinary income.
  • Excess losses can be carried forward indefinitely to offset future gains.

Business Losses (For Professional Traders)

  • Traders with Trader Tax Status (TTS) can deduct trading-related expenses, including software, internet costs, and office expenses.
  • Business losses are reported on Schedule C, and may offset ordinary income from other sources.


Steps to Declare Crypto Losses on Taxes

Record-Keeping Requirements
The IRS requires detailed records for all cryptocurrency transactions, including:

  • Transaction date and time
  • Cryptocurrency type and amount
  • Fair market value (FMV) in USD at the time of the transaction
  • Transaction fees and costs
  • Trading platform and wallet addresses

Using crypto tax software like CoinLedger, Koinly, or CoinTracker can help automate record-keeping and tax calculations.


Calculating Crypto Losses

  1. Determine Cost Basis:
    • The cost basis includes the original purchase price and transaction fees.
    • If crypto was bought at different times, the IRS allows methods like FIFO (First-In-First-Out) or Specific Identification.
  2. Calculate Capital Losses:
    • Capital Loss = Sale Price - Cost Basis
    • If the sale price is lower than the cost basis, the difference is a capital loss.


Reporting Crypto Losses to the IRS

  • Capital losses are reported on Form 8949 and Schedule D of the tax return.
  • Losses from foreign exchanges may trigger FBAR (FinCEN Form 114) or FATCA (Form 8938) requirements.
  • For business losses, report on Schedule C (Profit or Loss from Business).


Strategies for Maximizing Crypto Loss Deductions

Tax-Loss Harvesting

  • Selling underperforming crypto assets before year-end to offset taxable capital gains.
  • Be aware of the IRS wash sale rule, which prevents deducting losses if the same asset is repurchased within 30 days.

Carry Forward Capital Losses

  • If losses exceed the $3,000 deduction limit, the excess can be carried forward indefinitely to offset future gains.

Claiming Trader Tax Status (TTS)

  • Frequent traders who meet IRS criteria for TTS can deduct trading-related expenses.
  • This strategy is useful for individuals actively involved in daily crypto trading.


Conclusion

Declaring crypto losses in the U.S. can significantly reduce taxable income, but proper record-keeping and tax planning are crucial. By understanding IRS rules, offsetting gains, and utilizing tax-loss harvesting, crypto traders can optimize tax savings and remain fully compliant.


If you have any questions or require further assistance, our team at Block3 Finance can help you.

Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.

You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.

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