If you’ve lost money on your cryptocurrency investments, you might be wondering whether you need to pay taxes. The good news is that you generally won’t owe taxes if you lose money on crypto, but understanding how capital losses work in the context of crypto is important for managing your tax obligations.
How Does Crypto Loss Work for Taxes?
When you lose money on crypto, you have capital losses—which occur when the sale or exchange price of your crypto is lower than what you paid for it. For tax purposes, the IRS treats cryptocurrencies as property, not currency. This means the tax rules for crypto are similar to those for stocks or real estate. If you sell crypto for less than you paid, the resulting loss can help offset other taxable gains you may have.
Can You Offset Other Gains with Crypto Losses?
Yes, if you have a capital loss from selling or trading crypto, you can use it to offset other gains. For example, if you made a profit on other crypto sales or investments, your loss on one crypto asset can reduce the overall taxable amount by offsetting those gains. This is called tax loss harvesting.
If your losses exceed your gains, you can use up to $3,000 of the remaining losses to offset other types of income, such as wages or salary. If your losses exceed $3,000, the remaining losses can be carried forward to future years to offset gains in subsequent tax years.
When Are Crypto Losses Not Taxable?
While losing money on crypto doesn’t trigger taxes, the loss is only realized (and thus deductible) when you actually sell or exchange the crypto. If you hold onto the crypto and it loses value, but you don’t sell or trade it, the loss is not deductible. Essentially, your loss on an unsold crypto asset is considered an unrealized loss, and you can’t use it for tax purposes.
Reporting Crypto Losses
If you’ve realized a loss, you must report it on your tax return. You’ll report the sale or exchange of your crypto on Form 8949, calculating the difference between the amount you paid for the crypto and the amount you sold or exchanged it for. Then, you’ll include it on Schedule D to offset any gains or income.
Final Thoughts
In summary, you don’t pay taxes if you lose money on crypto, but you can use crypto losses to offset taxable gains and potentially reduce your tax liability. Make sure to keep detailed records of your crypto transactions and consult a tax professional if you’re unsure how to handle your losses.
