Can You Write Off Crypto Losses On Your Taxes?
For the most part, crypto investors have taken a beating throughout all of 2022. Not only has the value of most cryptocurrencies dropped since the beginning of the year, but several major crypto platforms have filed for bankruptcy along the way.
Celsius was one of them, and investors took this one pretty hard. The Celsius platform was well known for offering some of the highest yields on crypto savings accounts for the last few years, which actually seemed too good to be true at the time. The company filed Chapter Bankruptcy in July of 2022 due to a $1.2 billion deficit in its balance sheet.
Then there was FTX, which made quite the splash when it completely fell apart in the beginning of November 2022. This crypto trading platform is now under investigation for fraud, the former CEO Sam Bankman-Fried was actually just arrested in the Bahamas a few weeks ago.
With all this in mind, you may be wondering if you can write off some of your crypto losses when you file your 2022 tax return next year. As with many tax question, the answer is maybe.
I reached out to some tax experts and accountants to get their insights on when you can write off crypto losses, and here’s what they said:
You May Be Able to Write Off Crypto Losses If You Sold
They are able to fully offset or reduce their investment gains, he says, adding that some taxpayers may be able to write off up to $3,000 of ordinary income if they still have losses remaining.
“While remaining losses cannot be claimed this year, they can be carried forward to future years and claimed on future tax returns,” he said.
Still, it’s important to remember that you had to have realized the loss for any of this to apply. This means you had to sell your crypto.
Phillips adds that investors who did not sell and are holding crypto instead are generally not able to deduct the loss in value until they’ve sold the cryptocurrency. This is true even if they’re holding crypto that has little to no value at this point.
Losses Due To Theft
Phillips says that there are also situations where losses due to theft can lead to a tax write-off. Specifically, if a crypto loss relates to a theft or a criminal activity by the organization they invested their money with, taxpayers may be able to take a deduction via theft loss.
For a theft loss to be available, however, legal action would have to be brought against the person who perpetrated the theft and other requirements must be met.
Obviously, the rules around theft losses for income producing property are incredibly complex. With that in mind, Phillips says H&R Block recommends you work with a tax professional if you find yourself in this unfortunate situation.
Crypto Is Not Subject To Wash Sale Rules
According to financial advisor and accountant Eric Bronnenkant of Betterment, there are a few crypto-specific rules to know about as you look forward to next year’s tax return.
As Phillips mentioned, crypto losses (along with other capital losses) can be used to offset capital gains on stocks, bonds, mutual funds, ETFs, real estate, and more.
However, crypto is not subject to wash sales as it is not considered a security. This means investors could have sold their crypto at a loss in 2022 and bought the same crypto within 30 calendar days and may still be able to deduct that loss on their tax return.
This provides investors an opportunity to sell crypto at a loss and use the loss against gains or $3,000 of income, then buy it back immediately, said Bronnenkant. However, he adds that future laws may eliminate this tax strategy since the issue has made it on the radar of Congress.
Don’t Mess Up Your Tax Return Over Crypto This Year
If you’ve read the above and you’re still not sure whether you can write off crypto losses on your tax return, it’s probably best to get professional help. The same is true if you have crypto that is currently “frozen” due to a crypto exchange being in the midst of bankruptcy proceedings.
While you may not have any confirmed losses yet if your crypto exchange has suspended withdrawals, speaking with a tax expert who has experience with crypto can help you figure out your next best steps.
That said, there are some other moves you can make to ensure you don’t mess up your taxes over crypto next year. For example, CPA and tax expert Lisa Greene-Lewis of TurboTax says investors can start by making sure they have the correct cost basis for their crypto, and making sure they don’t forget about any losses that they can offset.
From there, they can work with a tax expert or use more sophisticated tax software to work on their returns. For example, Greene-Lewis says that TurboTax Premier software lets crypto investors easily import crypto Information from digital asset exchanges and wallets (up to 20,000 crypto transactions at once). From there, TurboTax will help guide customers to use any unrealized capital losses they may have from prior years, improving their tax outcome and lowering taxes owed.
The CPA adds that Intelligent Tax Optimization takes the work out of tracking down missing and accurate cost basis values and “assures accurate reporting of capital gains and losses by importing customers’ cost basis directly from financial institutions and crypto exchanges into the correct forms.”
Whether you opt to file your own taxes with the help of software or you decide to hire a professional, you should strive to write off as much of your crypto losses as you are legally able to. This means getting organized and taking a full accounting of your crypto losses — no matter how painful they are.