In 2022, cryptocurrency investors experienced a difficult year. Bitcoin and other digital assets suffered a severe beating. You may be able write off some losses when you file your federal tax return this tax season.
To offset gains, the Internal Revenue Service permits you to deduct investment losses (including cryptocurrency losses) from your tax return. To write off the loss, you must have sold the investment in question during the tax year. Paper loss (when the investment value drops below its purchase price, but you haven’t sold it) does not count.
We will discuss how you might be able use losses from the sale of digital assets, which include NFTs and stablecoins, to offset profits from other sales.
The key takeaway: You might be able write off some crypto losses when filing your 2022 tax return.
Do I need to pay taxes for crypto?
If you have sold cryptocurrency, you will likely be required to report it and possibly pay taxes. You can use the standard Form 1040 federal tax return to determine if you have engaged in any digital asset transactions for the 2022 tax year. If you have any questions or are in a complex tax situation, a tax advisor may be able to help you.
What You Need to Know
- You don’t have to report purchases. You don’t need to report if you just bought crypto or another digital asset. You can choose to check the box “no” on the Form 1040 question if this is your situation.
- Report capital losses and gains. You can have a capital gain if you sell an asset, including stocks, bonds, and crypto, for a higher price than what you paid. You may also owe taxes if you were paid crypto, including mining and staking. However, if you are able to deduct some of the loss from your taxes if you sell at a loss
- Learn how to distinguish between long-term and short-term gains. In general, capital gains or losses that occur within one year of purchasing an asset are considered short-term. It’s considered long-term if the asset has been held for more than a year and one day. Your income tax bracket will determine the tax rate.
How do I write off my crypto losses
Capital losses can be claimed by investors through the IRS. Capital loss is when an asset you have sold is less than you paid for.
What can you do
- Limits to deductions — If your capital losses exceed your capital gains, you may be able to deduct $3,000 per annum (or $1500 if married filing separately).
- Future deductions Any losses exceeding $3,000 may be carried forward to subsequent tax years. However, there is a $3,000 limit each year.
Reporting crypto for your tax return
Failure to report capital gains and losses on cryptocurrency transactions is like not reporting (and possibly paying taxes) on any other investment. You could be subject to criminal or interest-paying penalties, as well as disciplinary action by the IRS.
What can you do
- Keep accurate records. You should keep a record of every trade you make with cryptocurrency and the amount of each transaction as of the date of receipt.
- Fill in tax forms. Report most capital transactions and calculate capital gains and losses. You may also need Form 1040. This logs every purchase or sale of investments, crypto included, and Schedule D which summarises your capital gains and losses.
- Consider getting help. It can be difficult to calculate your tax liability for digital assets. You might consider hiring a professional tax return preparer. You can search the IRS directory to find federal tax return preparers. The IRS website also offers tips for choosing a tax professional.