Hi, I’m Bette Hochberger, CPA, CGMA. As cryptocurrency continues to gain popularity, many investors are learning that managing their finances can be complex, especially when it comes to taxes. If you’ve experienced losses in your crypto investments, understanding how to report these on your tax return is very important. This guide will help you navigate the process, ensuring you minimize your tax burden while complying with IRS regulations. Let’s jump in!

Understanding Crypto Capital Gains and Losses

When you sell or trade crypto the IRS treats these transactions as capital gains or losses. Capital gains occur when you sell an asset for more than you paid for it, while capital losses happen when you sell for less than your purchase price. For tax purposes, these losses can be used to offset other gains, potentially reducing your overall tax liability.

Reporting Crypto Losses

Record Keeping

The first step in handling crypto losses is to maintain accurate records. This includes the date of purchase, the amount paid, the date of sale, and the sale price. Good record-keeping ensures you have all necessary documentation to support your claims.

Calculate Your Losses

To determine your losses, subtract the selling price of your cryptocurrency from the purchase price. For example, if you bought Bitcoin for $10,000 and sold it for $6,000, your loss would be $4,000.

Form 8949

When it’s time to file your taxes, you’ll need to report your capital gains and losses on Form 8949. This form requires you to list each transaction, including details such as the date acquired, date sold, proceeds, cost basis, and the resulting gain or loss. Be sure to categorize your transactions as either short-term or long-term, depending on how long you held the asset.

Schedule D

After completing Form 8949, you’ll need to summarize your overall gains and losses on Schedule D. This form consolidates your transactions into a single report, helping the IRS understand your total capital gains and losses for the year.

Offset Your Gains

One of the beneficial aspects of reporting crypto losses is the ability to offset your capital gains. If you have both gains and losses, you can subtract your losses from your gains to lower your taxable income. For example, if you had $10,000 in gains but also $4,000 in losses, you would only be taxed on $6,000.

Carryover Losses

If your capital losses exceed your gains, you can use the remaining loss to offset ordinary income, up to a limit of $3,000 per year ($1,500 if married filing separately). If your losses are greater than this limit, you can carry over the excess to future tax years.

Seek Professional Advice

Navigating tax regulations can be complicated, especially with crypto always evolving. Consider consulting a tax professional who can provide personalized advice tailored to your situation. They can help ensure compliance with IRS rules while optimizing your tax strategy.

Handling crypto losses on your tax return may seem challenging, but with the right knowledge and preparation, you can effectively manage your reporting. Remember, staying informed and seeking professional assistance when needed can save you time and money in the long run.

Feel free to schedule a meeting with us if you need assistance with your crypto tax return, and I’ll see you next time!