How to Tax Crypto Losses
Updated: Apr 1, 2019
Many traders in 2017 were fortunate to have some taxable gains thanks to the massive bull run. However, there were also many investors who may have losses on crypto purchased in the subsequent bear market. Similarly to gains, losses also need to be reported and can also sometimes help offset some of the gains you may have had which can lower your overall tax bill.
A taxpayer may use the total net loss to reduce income dollar for dollar, up to the $3,000 limit. If the total net loss exceeds the yearly limit on capital loss deductions, carry the unused part over to the next year and treat it as though it had incurred in that next year.
If capital losses are more than capital gains, a taxpayer may claim a capital loss deduction. The allowable capital loss deduction, figured on Schedule D, is the lesser of the following:
$3,000 ($1,500 if taxpayer is married and files a separate return)
The taxpayer’s total net loss, as shown on Schedule D
Example:
You decided to buy 1 Bitcoin in June of 2017 for $2,000. In December of 2017, you also decided to buy 5 Ethereum for $1,000 each. Fast forward to June of 2018 and you decide to sell both your Bitcoin and Ethereum. You sell your Bitcoin for $6,000 and your Ethereum for $500 each. Your taxable gains would be calculated as the following:
Bitcoin: $6,000 current value of 1 Bitcoin - $2,000 cost basis = $4,000 taxable gain
Ethereum: $2,500 current value of 5 Ethereum - $5,000 cost basis = $2,500 taxable loss
TOTAL: $4,000 taxable Bitcoin gain - $2,500 taxable Ethereum loss = $1,500 total taxable gain
By reporting both your gains and losses, you would be able to offset $2,500 worth of gains. This information can be useful come the end of the year. By selling some underperforming cryptoassets and/or rebalancing your portfolio, you have the ability to lock in losses for that tax year and lower your overall tax bill come tax time.
Investors must be aware that cryptocurrency transactions result in capital gains AND losses that have to be reported on Form 1040, Schedule D, Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets, as appropriate.
For reference, this only applies to United States taxpayers. Taxpayers from other countries may have a different set of tax laws.