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Tax season 2023: Can you report crypto losses on your taxes?

Crypto assets must be reported on tax returns like any other property when they are sold. If you take a loss when selling it may offset your tax burden.

Selling crypto assets at a loss may lower your taxable income

Crypto asset valuations can fluctuate wildly but the general direction over 2022 was down, way down. Those that dipped their toes into the developing market, and seasoned investors alike, may have lost a pretty penny or two.

Like any other asset or property, crypto assets are taxed by the IRS when you sell them and make a profit. The level that the earnings you made from the sale are taxed depending on the length of time you held the asset. Should you make money on them you will have to pay either short-term or long-term capital gains tax.

However, if you sold the crypto asset for less than you bought it for, you may be able to subtract it from your capital gains or deduct that amount from your taxable income, up to a certain limit the year that the loss was regisitered. Any amount above that limit can be carried over indefinitely until you have exhausted the full amount that you lost in the transaction. Here’s a look at how to report crypto losses on your taxes…

How to report crypto losses on your taxes

Buying a crypto asset is not a taxable action in and of itself. However, when you sell that asset, you will have to report any gains and can declare any losses. Assets that are held for less than a year are short-term and those held for more than a year are long-term. Short-term gains are taxed like regular income while long-term investments are taxed at 0%, 15% or 20% depending on filing status and reported income.

Each year you must tally up all your earnings from the sale of property and assets that year, known as “realized gains”, and then subtract any capital losses from the sale of property and assets, or “realized losses.” Short-term losses are subtracted from short-term gains, and long-term losses from long-term gains.

Should the losses be greater than the gains, you can deduct up to $3,000 in net capital losses from your taxable income that year. If the amount of losses was greater than that threshold, you can carry over the remainder to future tax years. Furthermore, that deduction does not have to be used in the next tax year, but can be used in subsequent future tax years until the full loss realized is exhausted.

As with the buying and selling of any asset, those buying and selling crypto should be aware of the wash-sale rule. The wash-sale rule essentially discourages those trading securities from taking a loss to simply claim a tax benefit. Under the wash-sale rule, If you buy the same or a “substantially identical security” within 30 calendar days before or after, you cannot deduct a loss on a current-year tax return.

IRS forms to report crypto losses

Individual taxpayers typically fill out a version of the Form 1040 to file their income taxes. Depending on which credits, sources of income and/or deductions you are claiming, you will need to file out one or more of the Schedule forms to submit with their Form 1040.

The IRS provides a tax form where filers can detail net gains and losses, Form 8949 “Sales and Other Dispositions of Capital Assets,” which can then be reported on a Schedule D form. That information is then transferred to the taxpayers Form 1040.

For more information on trading in crypto and how the activity is taxed, the IRS provides a Frequently Asked Questions on what you should know. For general information on transactions related to property and assets you can also consult the Publication 544 from the IRS.