No one likes to lose, except when it’s time to file taxes! As I’m sure our readers are all too familiar with, calculating and reporting crypto losses is nothing short of tedious and painful. You may also find it very troublesome to accurately calculate gains/losses when crypto is transferred between wallets on different exchanges because there is no knowledge of the original cost basis of the transferred coin. As tax season quickly approaches, we want you to be prepared! Let’s briefly discuss a few methods to claim your crypto losses on your 2022 income tax returns.
When exactly can you claim a capital loss? Well, in order to claim a loss, a crypto taxable event needs to occur (i.e selling crypto, trading crypto,or spending crypto.) If these conditions are not met, the loss remains unrealized and consequently cannot be reported as a capital loss.
Now that that’s covered, let’s continue!
There are three main ways in which reporting crypto losses can lower your taxes: first, through income tax deductions, second, through offsetting capital gains and third through tax loss harvesting.
Let’s just say, hypothetically speaking, 2022 was not your year and you experienced total capital losses across all assets. What can you do to relieve yourself of the predicament you are in? Is there any deduction available? Don’t sweat too much, there is! The IRS tax code says that if you do not have enough realized capital gains to offset the realized capital losses in the current year, you may deduct up to $3,000 of your losses from your ordinary income. However, you may not deduct losses from your income if you experienced total capital gains across all assets. Please note though, regardless of your assets' collective performance (being in a gain or loss position), cryptocurrency losses can be used to offset other capital gains, either from the current tax year or future tax years (if carried forward).
Tax loss harvesting is known as strategically selling assets at a loss in order to offset your gains. Generally, you would sell an asset that's underperforming, then use that loss to reduce your taxable capital gains and potentially offset up to $3,000 of your ordinary income. For those that do not know, a wash sale is the act of selling and re-buying an asset within a 30-day time period, and these sales are not permitted in the U.S. for securities. But, since cryptocurrency is not considered to be a quote on quote ‘security’, wash sales are technically permitted and tax loss harvesting continues. Politicians and regulators have strongly hinted that the securities rules may very well be extended to cryptocurrency at some point and with this in mind we recommend the methods above to reduce your capital gains totals.
Thanks for checking in with us and our refresher on how you can take advantage of crypto losses during tax season! If you have any questions please feel free to schedule a call with us.