How to Report Crypto Losses & Reduce Your Crypto Taxes [US 2024]

13 Dec, 2023 · 30 min read

Crypto losses can actually benefit crypto investors and reduce their crypto taxes.

In the US, there is an amount of crypto losses that you can deduct on your crypto taxes while there are many legal ways to reduce your crypto tax bill.

Let’s discover how to calculate your capital losses, how to report crypto losses, how to write off lost or stolen cryptocurrency, if you can report NFT losses, reducing crypto taxes, and much more.

Key Takeaways about crypto losses in the US
  • In the US, you can deduct up to $3,000 of net capital losses in 2024;

  • You must report your crypto gains and losses in the right tax forms, including Form 8949;

  • Stolen or hacked cryptocurrency may not be eligible for tax deductions;

  • Long-term holding, donating crypto, and investing in retirement accounts are some of the best ways to reduce crypto taxes;

  • CoinTracking can help you automatically calculate crypto losses and generate tax reports ready to file.

Can you write off crypto losses on taxes?

In the US, for the tax year of 2024, you can deduct up to $3,000 in net crypto losses after offsetting your capital gains (including from stocks or cryptocurrencies).

How crypto losses offset capital gains

If an investor has capital gains from crypto trading, he would have to pay crypto taxes, but if he has losses from other trades, he can reduce his crypto tax bill by deducting those losses from his capital gains.

How do I calculate my capital losses?

Calculating Capital Losses

You calculate capital losses by deducting your cost basis from your sales proceeds in the crypto trade.

Example:

  • John bought 1 Bitcoin at $30K in June 2022 (cost basis)
  • John sold it for $25K in October 2023 (sales proceeds)
  • Capital losses: $25K-$30K= $5K

Long-Term vs. Short-Term Gains and Losses

An investor has long-term crypto gains if he holds his crypto for over 12 months before selling it for another crypto, FIAT (e.g., USD), or an NFT.

If you hold it for 12 months or less before selling, you’d get a short-term capital gain, taxed at a higher rate, ranging from 10% to 37%, than long-term gains, ranging from 0% to 20%.

If an investor bought 1 ETH for $1.5K in November 2021 and sold it in December 2022, he’d pay a long-term capital gains tax rate since he had held it for over 12 months.

Cost-Basis Basics

The cost basis of an investor in a trade is the amount he paid to acquire the asset that he sold. For example, if the investor bought 1 Bitcoin at $30K, his cost basis in the Bitcoin is $30K.

Claiming Abandonment Loss

Under the US tax law, a taxpayer is allowed a deduction for a loss sustained upon the abandonment of property used in a trade or business or a transaction entered into for profit.

When a crypto asset is no longer valuable but is not yet worthless, you can claim an abandonment loss deduction if you truly abandon it. To abandon an asset, you must permanently surrender and relinquish all rights in the asset and receive no compensation in exchange for it.

Abandonment loss is an ordinary loss regardless of whether or not the abandoned asset is a capital asset. The loss is reported on Form 4797, not on Form 8949 for capital gains/losses.

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How much can you save by claiming crypto losses?

You can deduct up to $3,000 in net crypto losses in 2024, but there are other legal ways to reduce crypto taxes beyond claiming losses, including long-term holding, redirecting crypto to retirement products, donating crypto, etc.

How to Report Crypto Losses on Your Taxes

How to report your capital losses with crypto tax software

Crypto tax software can automatically determine the loss or gain in each crypto trade after importing them, while enabling investors to generate the necessary tax reports with the right information.

CoinTracking enables all of this across hundreds of exchanges, wallets, or blockchains, with investors being able to issue tax reports with all their crypto gains and losses.

Do you have to report crypto losses to the IRS?

Yes, according to the IRS, investors in the US have to report all of their gains and losses each tax year on the appropriate crypto tax forms, including Schedule D and Form 8949 on their Form 1040.

In the US, investors have to report their crypto gains and losses, separated by their holding period to properly file their crypto taxes.

The top 5 ways to gain from your crypto losses

1. Offset gains with crypto losses

The first advantage of having some crypto losses is that you can legally use them to lower your capital gains and effectively pay fewer taxes.

According to IRS rules, you can deduct your capital gains by using your capital losses. If you have any remaining losses after offsetting all your gains, you can deduct an additional net loss of up to $3,000 for the year.

2. Don’t have gains? Carry the losses for future years

If you do not have gains from crypto trading, you can claim a net loss deduction of $3,000 in the current tax year.

If you have more than $3,000 in losses, you can carry the remaining over to the following years until you fully utilize all the losses.

3. Crypto tax loss harvesting

If you have a lot of capital gains from crypto trading and you start to realize that you’ll have a big tax bill coming next year, crypto tax loss harvesting may be an option.

Do you have a coin in your portfolio that has lost most of its value, and you don’t believe it will recover in the short or medium term?

In that case, you may want to realize the loss from that coin and use that loss to offset your gains from your other trades, effectively reducing your tax bill.

4. Wash sale rule

You’ll be able to get around the wash sale rule for crypto trades. What is the wash sale rule?

It’s when you sell a coin for a loss and buy back substantially the same coin within 30 days before or after the sale, re-initiating the holding period as it is a new trade.

By not having the wash sale rule, you can sell for a loss, buy back the coin, claim the loss that you just had, and reduce your other gains.

5. Reporting crypto losses on your taxes

In the US, you have to report your crypto losses on your trades the same way you would report your crypto gains.

On Form 8949, you’ll have to report each trade where you have a loss with the usual information: cost basis, sales proceeds, date of acquisition, date of sale, and loss on the trade.

You’ll also have to include your crypto losses on Schedule D of your Form 1040 (the US Individual Income Tax Return). If you have bought and sold crypto during the tax year, you’ll also have to answer “Yes” to the crypto question on top of page 1 of Form 1040.

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Can I sell cryptocurrency at a loss and buy it back?

Yes, investors in the US, due to the lack of a crypto wash sale rule, can sell a cryptocurrency at a loss and immediately buy it back, deducting that loss and benefiting from the tax reduction.

What is the wash sale rule?

The wash sale rule applies to assets like stocks, prohibiting investors to sell an asset at a loss and buy it back within 30 days. Investors can actually do that but they can’t claim the tax deduction from that loss, which is called the wash sale rule.

Do capital losses offset short-term or long-term capital gains?

In the US, investors can claim capital losses of up to $3,000 in their capital gains of the same type. If investors have short-term losses, you can deduct them from your short-term capital gains while if they have long-term losses, they can deduct those losses from long-term capital gains.

Can Crypto Losses Offset Stock Gains?

Yes, you can deduct your crypto losses of up to $3,000 to other capital gains from stock trading.

Crypto Losses vs. Stock Gains

Investor buys+sells Stock X at a profit

  • Date acquired: October 2021

  • Cost basis: $1,000

  • Sales proceeds: $1,800

  • Date sold: November 2022

  • Holding period: 13 months (long-term)

  • Gain/Loss: $800 ($1,800-$1,000)

Investor buys+sells Token Y at a loss

  • Date acquired: April 2021

  • Cost basis: $1,000

  • Sales proceeds: $800

  • Date sold: June 2022

  • Holding period: 14 months (long-term)

  • Gain/Loss: -$200 ($800-$1,000)

Can you claim a capital loss if you haven’t sold your crypto?

No, you can only deduct losses from your gains if you realized that loss, meaning, if you sell your crypto at a loss. If you have unrealized losses, those cannot be used to lower your other capital gains and your taxes.

Unrealized losses explained

Unrealized losses are holdings that you have in your portfolio that are currently (at market prices) below the purchase price you paid for them. You’ll have a “theoretical” loss in your portfolio but the loss will only be “real” if you sell your holdings at a loss (realized loss).

What if I earned crypto income and the price went down?

When you earn crypto income, you must realize the Fair Market Value (in USD) at the time you received it. You’ll pay income taxes over that value (alongside your total income for the year). If those coins lower in price, you cannot claim a loss from that. Only capital losses from trading can be deducted in other capital gains, not income.

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Can I write off lost or stolen cryptocurrency?

My Bitcoin was destroyed. Can I claim a loss?

You cannot destroy Bitcoin itself. However, let’s say the crypto wallet where you stored your Bitcoin holdings gets destroyed in an accident. Unfortunately, that’s a personal casualty loss, and you wouldn’t be able to claim a tax deduction on it.

Do I have to pay taxes on rugged coins?

In short, yes, you have to pay taxes on crypto income that may be worth zero if rugged.

Let’s imagine that you receive $500K today in a new airdrop. According to the tax regulations in the US, you have to recognize income in the fair market value of the coins you received.

Now, a week later, the founder cashes out and leaves behind investors in what’s called a rug pull. The token price drops to near 0, and your holdings go to near 0.

What is the tax obligation here, assuming that you recognized the airdrop when you received it on day 1?

In this case, you will be able to claim a capital loss because now the coin is worthless. From a logical perspective, you would think the income you recognized and the loss you claimed is a complete offset, and the tax effect is zero.

However, since capital loss only offsets capital gains, not ordinary income, you may end up with a large tax liability due to the airdrop income and a limited capital loss deduction for the year due to the annual $3,000 net loss deduction limitation.

Of course, you can carry forward the remaining capital loss to the following years, but you still end up with a large tax bill for the current year. We understand that it seems unfair. You can probably document the whole process and claim a tax position that no income should be recognized for the airdrop because:

  • You didn’t ask for it;
  • You had no control over its arrival in your wallet;
  • You did not gain any benefit because you were never able to sell the coin before its value went down to zero.

We recommend that you consult your tax advisor for further guidance on your personal situation.

How to claim a loss if I have no way of selling the rugged token?

If the coin is still showing in your exchange or wallet account, it will be difficult to claim a loss unless you can prove that the coin has no fair market value and you cannot sell it anywhere.

There are two strategies we usually suggest our clients do:

  1. Send the coin to a burn address and burn it;
  2. Send the coin to a friend in exchange for a nominal amount (e.g., $0.01) and use that amount as your sales proceeds to claim a loss on the sale.

If you received the rugged coin from an airdrop and never reported income on its receipt, then your basis in the coin is zero, and you cannot claim a loss anyway.

I was not a victim of a rug pull, but my coins lost 99% of value. Can I offset it for tax purposes?

In these cases, you need to have evidence that the coin has no Fair Market Value (FMV) and is not listed on any exchange. If you can prove those two conditions, you can claim a worthless coin capital loss deduction in the amount of your cost basis by treating sales proceeds as zero.

I lost my crypto in a boating accident. It was not stolen. Can I claim a loss for tax purposes?

The boating accident story is very common in crypto circles as many holders believe that you can hide your crypto or claim losses if you say you lost all your holdings on such an incident (e.g., boat accident, fires, etc.).

However, according to new tax laws, you most likely will not be able to claim an investment loss in these cases because personal casualty losses are not tax deductible.

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Can I write off cryptos if an exchange goes bankrupt?

If a crypto exchange goes bankrupt and you’ve tied up funds in your account, you’d have to wait until the end of that insolvency process and for the payout to each customer before claiming a loss deduction for the funds you cannot recover.

Can I report NFT losses on my taxes?

Yes, in the US, you can deduct up to $3,000 in crypto losses, including realized losses from NFT trading, which you can deduct on your other capital gains and reduce your crypto taxes.

You can report your NFT losses on Form 8949. Discover other tax forms you need to use for NFT losses.

Do I have to pay tax on stolen or hacked crypto?

If you had your crypto stolen by someone else or you were a victim of a crypto hack, you’re no longer in the possession of your crypto holdings. In that case, you wouldn’t be responsible for any trades or taxable events from those holdings.

The question here is if you can deduct the losses at your cost basis when your coins were stolen/hacked from exchanges or wallets.

Unfortunately, in most cases, you won’t be able to claim a loss. Under the current tax law, this situation is a personal casualty loss, which is no longer tax-deductible. Same for theft loss.

If you’re a victim of a big crypto scam, you should report the case to the FBI. You may be able to claim a loss deduction if you are a qualified investor and you have suffered a qualified loss under Revenue Procedure 2009-20. We recommend that you seek professional advice from a qualified CPA or tax attorney for further details.

Crypto losses in other countries

Canada

In Canada, investors can deduct up to 50% of their crypto losses in their other capital gains (if they have them), postpone the deduction of those losses in subsequent years, or even deduct previous gains (up to three years). Discover more in our Canada crypto tax guide.

Australia

In Australia, investors (not professional traders) can deduct their crypto losses from their capital gains if they meet certain criteria, while stolen or lost crypto can also be deducted (if you prove the ownership). Read more about crypto taxes in Australia.

UK

In the UK, you can deduct crypto losses on your capital gains, reducing your crypto tax bill. Learn how to report those crypto losses in the UK.

FAQ about how to
Report Crypto Taxes

Questions and Answers on Crypto Portfolio Tracking & Crypto Taxes

If you are not yet familiar with CoinTracking, these frequently asked questions are an ideal starting point for using our expertise and clarifying important issues.

What kind of crypto losses can be deducted from tax?2023-11-24T12:49:31+01:00

Losses from crypto/NFT trading can be realized and offset your other capital gains, while stolen or hacked cryptocurrency cannot be deducted.

Should I report losses on crypto?2023-11-24T12:49:12+01:00

In the US, you have to report all of your crypto gains and losses in the right tax forms, from Form 1040 to Form 8949.

How much crypto losses can you claim?2023-11-24T12:48:39+01:00

According to the IRS, in 2023, you can deduct up to $3,000 in crypto losses in the US from your capital gains.

Can you write off crypto losses on taxes?2023-11-24T12:48:13+01:00

Yes, in the US, you can write off crypto losses, effectively reducing your crypto taxes by lowering your other capital gains.

Conclusion

Crypto losses present a great opportunity for investors to reduce crypto capital gains and pay fewer taxes, when investors properly track their gains/losses and report their crypto taxes.

However, there are few other ways to reduce crypto taxes, from long-term holding to looking for crypto tax free states or countries. If you plan to enjoy a long-term tax rate (reduced rate), you need to prove the long-term nature of those trades. 

The best way to track your crypto trades, determine crypto losses, and generate tax reports to authorities is with crypto tax software like CoinTracking.

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.

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Moritz Nold: Crypto Tax Manager
Autor
Moritz
Crypto Tax Manager
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.

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