Many cryptocurrencies like Bitcoin and Ethereum skyrocketed to all-time highs in 2021. People who invested prior to 2021 raked in great returns.
But that hasn't been the case in 2022. Cryptocurrencies have taken a hit, which means you might have to sell at a loss if you dispose of your assets.
Losses don't always have to be a bad thing if you know how to turn them into wins on your tax return. We'll break down how taxes on crypto work with tax-loss harvesting so you can slash your tax bill this year.
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How is crypto taxed?
Crypto market losses can feel like a slap in the face until you discover tax-loss harvesting. This strategy allows you to reduce your tax bill by offsetting capital gains with capital losses. Since the IRS classifies cryptocurrency as property, the crypto tax rate follows the same capital gains and loss rules that apply to stocks.
Let's say you invested in Bitcoin at $10,000 and disposed of your cryptocurrency when it reached $30,000. You would have to pay taxes on crypto gains of $20,000. You incur a capital gain when you sell cryptocurrency at a higher price than you originally paid for it. That original investment amount is typically referred to as your cost basis.
But if you sell cryptocurrency at a lower price than you originally paid for it, you have a capital loss. Through tax-loss harvesting, your crypto losses can offset your other crypto or stock market gains. If your losses exceed your gains, you can take up to $3,000 worth of losses to offset your ordinary income. Any additional losses are carried forward to the next year. The tax-loss harvesting rules make it easier to slash your tax bill now and in the future.
Can you benefit from tax-loss harvesting?
Before you get too excited about the idea of tax-loss harvesting, make sure you qualify.
First, you can only use tax-loss harvesting in a taxable investment account. If you have cryptocurrency in a self-directed IRA, you won't be able to enjoy the benefits of tax-loss harvesting.
You also must have a realized loss to qualify for tax-loss harvesting. Let's say you haven't sold any of your cryptocurrency this year but see steep declines in your portfolio. That means you only have a paper loss. You don't have a realized loss until you dispose of your cryptocurrency. Therefore, you are not eligible to take advantage of tax-loss harvesting.
Turn your crypto loss into a tax victory
If you earned mega-profits from one cryptocurrency, you can offset your gains with losses from another cryptocurrency. If you had stock market gains, your crypto losses could also offset those amounts. This allows you to reduce your tax liability.
Let's say you bought $10,000 worth of Ethereum in 2020 and sold it for $30,000 in 2022. That's a $20,000 capital gain. On the flip side, you took a $40,000 loss on your long-term investment in Bitcoin when you sold it. Since your capital losses exceed your gains, you don't have to worry about paying taxes.
You'll also get a chance to use up to $3,000 of your capital losses to offset ordinary income. In this example, you'll end up with an excess loss of $20,000. After using the $3,000 loss in the current year, you can carry forward the remaining $17,000 to future years until you've used up your basket of losses.
How to file crypto taxes
If you sell cryptocurrency in a taxable investment account in 2022, you'll be responsible for paying taxes on your profits. You'll also need to report your crypto losses if you want to snag a tax deduction. You can report your capital gains and losses from your crypto transactions on IRS crypto tax Form 8949.
You'll have to provide the following:
- Name of the cryptocurrency you sold
- Date you bought your crypto
- Date you sold your crypto
- Price you sold your crypto for
- Cost basis
- Gain or loss
Your crypto exchange or broker will send you Form 1099, which will have the details you need to complete Form 8949, so you won't have to come up with the numbers from scratch. After you fill out Form 8949, you'll have to transfer the required information to Schedule D to determine your capital gain or loss.
Don't take your crypto tax wins for granted
If you suffered major crypto losses on paper, it's not time for a pity party. You can hang on to your investments or use tax-loss harvesting to reduce the impact of any gains in your portfolio. Decide which strategy works best for your portfolio, and set yourself up for a winning situation no matter what happens in the markets.
Charlene Rhinehart, CPA has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
FAQs
If you earned mega-profits from one cryptocurrency, you can offset your gains with losses from another cryptocurrency. If you had stock market gains, your crypto losses could also offset those amounts. This allows you to reduce your tax liability.
Should I report crypto losses on taxes? ›
The IRS requires US taxpayers to report all cryptocurrency transactions, including sales for losses. Failure to properly report can lead to penalties and increased scrutiny from the IRS, and if you don't report crypto losses, you cannot use them to offset capital gains or income.
How do you write off crypto gambling losses? ›
As stated by the IRS, "you may deduct gambling losses only if you itemize your deductions on Schedule A (Form 1040) and kept a record of your winnings and losses. The amount of losses you deduct can't be more than the amount of gambling income you reported on your return.
Can crypto losses offset income tax? ›
No, crypto capital losses cannot be carried back to offset gains from previous years. They can only offset gains in the same year or be carried forward.
Do you get a tax break if you lose money on crypto? ›
Thankfully, crypto losses are a candidate for tax write-offs, like any other type of investment losses. That means you can use the losses to offset capital gains taxes you owe on more successful investment plays.
Can I write off investment losses on my taxes? ›
The IRS allows you to deduct from your taxable income a capital loss, for example, from a stock or other investment that has lost money. Here are the ground rules: An investment loss has to be realized. In other words, you need to have sold your stock to claim a deduction.
Do you have to report crypto if you don't sell? ›
Crypto is generally not subject to immediate taxation, assuming you purchased the crypto as an investment and didn't acquire it as a form of income or by other means. This means that when you US taxpayers purchase crypto, there is no immediate reporting requirement until you sell.
How to withdraw crypto without paying taxes? ›
There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.
Is a win loss statement good enough for taxes? ›
Can a win loss statement be used for tax purposes. Yes, you can use it for your tax year if you have won and lost money through gambling venues such as lotteries, raffles, horse races, and casinos. Remember, you can only deduct losses up to the amount of your winnings.
How to prove gambling losses? ›
Your spreadsheet detailing your wins and losses for the day, along with ATM receipts showing withdrawals, can be helpful in demonstrating your gambling activity. However, the IRS may also require additional documentation, such as casino records or statements, to substantiate your losses.
Limitations on loss deductions
The amount of gambling losses you can deduct can never exceed the winnings you report as income. For example, if you have $5,000 in winnings but $8,000 in losses, your deduction is limited to $5,000. You could not write off the remaining $3,000, or carry it forward to future years.
How do you record crypto losses on taxes? ›
Reporting your crypto activity requires using Form 1040 Schedule D as your crypto tax form to reconcile your capital gains and losses and Form 8949 if necessary. You report your total capital gains or losses on your Form 1040, line 7.
Can I report crypto losses from 2 years ago? ›
If you sell cryptocurrency, or any other capital asset, less than one year from the day after you acquire it, your capital gains are considered short term. If the "holding period" is one year or longer, proceeds of its sale are considered long-term gains (or losses).
How to report crypto on taxes? ›
The IRS Form 8949 is the tax form used to report cryptocurrency capital gains and losses. You must use Form 8949 to report each crypto sale that occurred during the tax year. If you had other (non-crypto) investments during the tax year, you must report them on separate Forms 8949 when you file your taxes.
Do I need to report crypto if I didn't make a profit? ›
Do you have to pay taxes on Bitcoin if you didn't cash out? In the event that you held your crypto and didn't earn any crypto-related income, you won't be required to pay taxes on your holdings. However, trading BTC for other cryptocurrencies is considered taxable. Yes.
Do you owe money if your crypto goes negative? ›
Despite the risks involved, shorting crypto has advantages, making it a high-risk, high-reward strategy. So, answering if a crypto goes negative, do you owe money? You may have to pay the buyer to sell if the crypto value goes negative when you sell off the bought cryptocurrency.
Do you have to report crypto under $600? ›
Is it necessary to report crypto transactions under $600? US taxpayers must report every crypto capital gain or loss and crypto earned as income, regardless of the amount, on their taxes.
Do I have to list every crypto transaction on Form 8949? ›
All cryptocurrency disposals need to be reported on Form 8949. You are required to include cost basis, gross proceeds, and the date of receipt and disposal for each crypto-asset. Is crypto reported on Schedule D? Your net capital gain or loss from all sources (including cryptocurrency) should be included on Schedule D.
