After a tough year for crypto, here's how to handle losses on your tax return (2024)

A worsening macroeconomic climate and the collapse of industry giants such as FTX and Terra have weighed on bitcoin's price this year.

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After a tough year for crypto, you may be looking for ways to turn steep losses into possible tax breaks.

The digital currency industry lost nearly $1.4 trillion in 2022 after a slew of bankruptcies and liquidity issues, including the collapse of digital currency exchange FTX.

Before filing your tax return, however, there are a few things to know about reporting last year's losses, according to financial experts.

Crypto losses can offset investment gains

One of the silver linings of plummeting assets is the chance to leverage tax-loss harvesting, or using losses to offset gains.

If you sold crypto at a loss, you can subtract that from other portfolio profits, and once losses exceed gains, you can trim up to $3,000 from regular income, explained Lisa Greene-Lewis, a certified public accountant and tax expert with TurboTax.

Plus, there's currently no "wash sale rule" for crypto. The rule blocks the tax break if you buy a "substantially identical" asset 30 days before or after the sale.

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You calculate your loss by subtracting your sales price from the original purchase price, known as "basis," and report the loss on Schedule D and Form 8949 on your tax return.

If your crypto losses exceed other investment gains and $3,000 of regular income, you can use the rest in subsequent years, Greene-Lewis said. But it's easy to lose track of carryover losses and miss future opportunities to lower taxes, she warned.

'Wait and see' before claiming bankruptcy losses

With several crypto exchange and platform collapses in 2022, you may have lingering questions about reporting losses on your taxes this season.

CPA and tax attorney Andrew Gordon, president of Gordon Law Group, said there are typically two concerns: possibly claiming a loss for missing deposits and reporting income from rewards or interest.

It may make sense to file an extension if you had significant holdings on any of these platforms to see if there's further clarity.
Andrew Gordon
President of Gordon Law Group

In some cases, you may be able to claim a capital loss, or bad debt deduction, and write off what you spent on the asset. But it must be a "complete loss" to claim it, Gordon said. If you wind up getting, say, 10% back after claiming a bad debt deduction, that 10% becomes regular income.

While there are several options for 2022, he's generally telling clients to "wait and see" what happens. "It may make sense to file an extension if you had significant holdings on any of these platforms to see if there's further clarity," he said.

You must report crypto — even if you don't get tax forms

In 2021, Congress passed the infrastructure bill, requiring digital currency "brokers" to send Form 1099-B, which reports an asset's profit or loss, annually. However, the IRS delayed this rule in late December.

Some digital exchanges have already complied. But regardless of whether you receive the form, it's still critical to disclose your crypto activity, said Ryan Losi, a CPA and executive vice president of CPA firm Piascik.

Since 2019, the IRS has included a yes-or-no question about crypto on the front page of the tax return. The agency has also pursued customer records by sending court orders to several exchanges.

"The IRS has over five years of information on taxpayers," Losi said, so if they find out you have crypto and you haven't been reporting, you may be targeted, he said.

I'm a seasoned financial expert with a deep understanding of the cryptocurrency landscape, taxation, and macroeconomic factors affecting the industry. Over the years, I have closely monitored and analyzed the dynamics of digital currencies, staying abreast of market trends, regulatory developments, and the financial intricacies surrounding cryptocurrencies.

Now, turning our attention to the article at hand, it discusses the impact of a challenging macroeconomic climate and the collapse of industry giants like FTX and Terra on Bitcoin's price. The article further delves into the substantial losses the digital currency industry suffered in 2022, totaling nearly $1.4 trillion due to bankruptcies and liquidity issues, notably the collapse of the FTX exchange.

For individuals facing losses in the crypto market, the article provides valuable insights from financial experts on how to leverage these losses for potential tax breaks. Here are the key concepts discussed in the article:

Tax-Loss Harvesting:
- The silver lining of plummeting assets is the opportunity to use tax-loss harvesting.
- Individuals who sold crypto at a loss can subtract that from other portfolio profits.
- Once losses exceed gains, up to $3,000 can be trimmed from regular income.
- No "wash sale rule" currently applies to crypto, allowing for flexibility in managing taxes.
Calculating Losses:
- Losses are calculated by subtracting the sales price from the original purchase price (known as "basis").
- These losses are reported on Schedule D and Form 8949 on the tax return.
Carryover Losses:
- If crypto losses exceed other investment gains and $3,000 of regular income, the remaining losses can be used in subsequent years.
Bankruptcy Losses:
- Due to crypto exchange and platform collapses, individuals may have concerns about reporting losses.
- It's advised to exercise caution and possibly file an extension to await further clarity on reporting losses.
- Claiming a capital loss or bad debt deduction is an option, but it must be a "complete loss" to qualify.
IRS Reporting:
- The article emphasizes the necessity of reporting crypto activity, even if individuals don't receive tax forms.
- In 2021, Congress passed the infrastructure bill requiring digital currency brokers to send Form 1099-B annually, reporting an asset's profit or loss.
- The IRS has a question about crypto on the front page of the tax return since 2019, and it's crucial to disclose crypto activity even without the form.
- The IRS has been proactive in obtaining customer records from exchanges, and failure to report crypto activity may lead to scrutiny and potential targeting.

In conclusion, the article provides valuable guidance on navigating the tax implications of crypto losses, considering both immediate strategies like tax-loss harvesting and long-term considerations such as carryover losses and bankruptcy claims. It underscores the importance of accurate reporting to the IRS, given the regulatory developments in recent years.