Cryptocurrency investors had a tough year in 2022, with bitcoin and other digital assets taking a beating. But you may be able to write off some of your losses when you file your federal return this tax season.
The Internal Revenue Service allows you to deduct investment losses — including cryptocurrency losses — to offset gains. One important caveat: You must have sold the devalued investment during the tax year to write off the loss. A paper loss (when investment value dips below purchase price but you haven’t sold it) doesn’t count.
We’ll review how you may be able to use losses on the sale of digital assets — which include NFTs, stablecoins and cryptocurrencies — to offset profit from other sales.
Key takeaway: You may be able to write off some of your crypto losses when you file your 2022 tax return.
Do I have to pay taxes on crypto?
If you sold cryptocurrency, then yes, it likely qualifies as a taxable transaction you’ll have to report and potentially pay taxes on. For the 2022 tax year, you can work through the standard Form 1040 federal return, which asks whether you engaged in any digital asset transactions. Though if you’re in doubt or have a particularly complex tax situation, you may want to reach out to a tax advisor.
What you need to know
- Purchases don’t need to be reported. If you simply bought a digital asset like crypto and held it, there’s nothing to report to the IRS. If this is your exact situation, you can check the “no” box on the Form 1040 question.
- Report capital gains and losses. If you sell an asset — including stocks, bonds and crypto — for a price that exceeds what you paid for it, you have a capital gain. Additionally, if you received crypto as payment — including staking and mining — you may owe taxes. But if you sell for a loss, you can deduct some of that loss from your taxes.
- Understand long-term vs. short-term gains. Generally, if you sell the asset one year or less after buying it, your capital gain or loss is considered short-term. If you’ve held the asset for at least a year and a day, it’s long-term. The tax rate will vary depending on your income tax bracket.
How to write off crypto losses
The IRS allows investors to claim a deduction on capital losses. A capital loss occurs when you’ve sold an asset for less than what you paid for it.
What you can do
- Limits on deductions — If your capital losses are more than your capital gains, you can deduct up to $3,000 per year (or $1,500 if you are married and filing separately).
- Future deductions — Any losses more than $3,000 can be carried over as deductions in subsequent tax years (at the same $3,000 limitation each year).
Reporting crypto on your tax return
Failing to report on capital gains or losses on cryptocurrency transactions would be like not reporting (and paying taxes) on any other investment. The IRS could take action against you, including levying interest payments, penalties or even criminal charges.
What you can do
- Keep accurate records. It’s important to carefully track of all your cryptocurrency trades and record the value of each one as of the date of receipt.
- Fill out tax forms. You’re required to report most sales and other capital transactions and calculate capital gains or losses. Besides Form 1040, you may need Form 8949, which logs each purchase or sale of all investments, including crypto, and Schedule D, which summarizes your total capital gains and losses from all of your investments.
- Consider getting help. Figuring out your tax liability on digital assets can be complicated, so you may be thinking about hiring a professional to file your tax return. The IRS offers a searchable directory of federal tax return preparers. You can also find tips on choosing a tax professional on the IRS website.