There are a few ways in which crypto losses can be used to reduce taxable capital gains, including tax-loss harvesting (see below), offsetting income and trading fees.
In order to see if you can claim a loss on your taxes for cryptocurrency you sold, there are a few steps you need to go through:
- Determine your cost basis, in simple terms, this means figuring out how much you originally paid for your cryptocurrency in USD.
- Add any trading fees you paid (for instance, Coinbase could have charged you up to 4% if you bought crypto with a credit card)
- Get the final “'cost” figure that should be deducted from the disposal proceeds (in USD) from disposing of the asset, giving you the gain/loss made from that disposal.
- Subtract the amount of your total crypto losses from your total crypto gains for the year to determine if you owe any money to the IRS
Pro-tip: One way to decrease your gains in a year is tax-loss harvesting, which is much easier for crypto than for stocks and bonds because the wash sale rule does not apply, meaning that selling and reacquiring crypto on the same day will allow you to realize the loss on those assets and end the day with the same assets you started with.
If you did end up having losses for the year, this can often be used to offset up to $3,000 of income for that year. We advise speaking to a qualified tax professional if this is your intention, as there are certain taxation caveats around this which are quite complex.
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Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.