Cryptocurrency losses in 2022 were widespread. You may qualify for tax reduction if you sold or spent crypto at a loss or if your holdings became worthless and are not tradable on any platform.
The industry saw nearly $1.4 trillion in losses due to exchange collapses.
Deducting losses from federal income tax is possible, but it depends on the nature and duration of your crypto ownership. Read on for more details.
What to Know About Crypto Losses and Your Taxes
The IRS taxes cryptocurrencies like other capital assets, such as stocks and real estate.
Profits from asset disposition are capital gains, subject to special tax rates.
Selling or using crypto for goods and services counts as disposal, with capital gains or losses calculated from acquisition to use.
Only realized losses or gains through disposal can be claimed on income tax.
If a cryptocurrency becomes worthless, intentional discarding may allow claiming a loss (Abandonment Loss).
Calculating Capital Losses
When selling or utilizing cryptocurrency, determining the capital gains or losses involves subtracting its market value in U.S. dollars on the disposal date from its adjusted cost basis at the time of acquisition.
The adjusted cost basis is the fair market value of the cryptocurrency (also in U.S. dollars) on the acquisition day, inclusive of any associated fees incurred during the acquisition process.
The calculation applies whether you bought, received as payment, traded, or mined the cryptocurrency.
Long-Term vs. Short-Term Gains and Losses
U.S. tax law classifies capital gains on cryptocurrency into short-term (held for less than a year) and long-term (held for one year or more).
Short-term gains are taxed as part of regular income, with rates ranging from 10% to 37%.
Long-term gains are subject to lower capital gains rates, varying from 0% to 20%, based on your tax bracket.
Also read: What is crypto malware?
Cost-Basis Basics
When selling part of your cryptocurrency holdings, the IRS allows various methods to determine cost basis for calculating gains or losses: FIFO (oldest batch), LIFO (most recently purchased), and HIFO (highest-cost portion).
Choosing the right method can impact your capital loss for tax purposes.
HIFO is generally favorable for reducing tax liability, but consider your situation and seek professional advice if needed.
Consistency is crucial within a tax year, and proper documentation is required for LIFO or HIFO.
Failing to document market value defaults cost basis to $0, treating all proceeds as capital gains.
Claiming Abandonment Loss
You can report a loss on a cryptocurrency that has become worthless, meaning it holds no market value and is not featured on any exchange, according to the IRS.
You can achieve this through a procedure known as abandonment.
To execute this, you need to record the cryptocurrency’s value when you obtained it, express your intent to abandon the cryptocurrency, and subsequently discard it by transferring it to a null address to preclude any potential trades.
How to Report Crypto Losses on Your Taxes
Reporting cryptocurrency gains and losses on your tax return is similar to other asset reporting.
Check Form 1099-B for 2022 trades; keep separate those reporting cost basis to the IRS.
For non-1099-B transactions, document acquisition date, cost basis, disposal date, and selling amount. Use IRS Form 8949 for transactions:
- With 1099-B (check Box A for reported cost basis, Box B for non-reported).
- Without 1099-B (check Box C for short-term, Box E for long-term).
Enter net gains/losses from Form 8949 on Schedule D of IRS Form 1040. Part I for short-term, Part II for long-term.
Use specific lines based on checkboxes:
- Line 1b, 2, 3 for short-term gains/losses (checkboxes A, B, C).
- Line 8b, 9, 10 for long-term gains/losses (checkboxes D, E, F).
For abandonment loss on worthless cryptocurrency, use IRS Form 4797, Line 10.
Can Crypto Losses Offset Stock Gains?
Cryptocurrency losses can offset taxes on gains from various assets, like stocks and real estate.
If your losses exceed gains, you can use them to decrease taxable income, reducing your overall tax bill.
In 2020, you invested $2,000 in XYZ Corp. shares and $1,000 in Examplium crypto; by 2022, you sold the stock for $2,800 and the crypto for $100.
| Crypto Losses vs. Stock Gains | ||||
|---|---|---|---|---|
| Asset | Holding Period | Cost Basis | Market Value Upon Disposal | Capital Gain or (Loss) |
| XYZ Corp. common shares | Two years | $3,000 | $3,700 | $700 |
| Examplium cryptocurrency | Two years | $1,000 | $200 | ($800) |
If you have a $700 long-term capital gain on stocks and an $800 long-term capital loss on cryptocurrency, resulting in a net capital loss of $100, you’re exempt from capital gains taxes for the year.
IRS permits annual deduction of up to $3,000 ($1,500 for married filing separately), lowering taxable income by claimed losses.
Offsetting gains with losses, both long-term and short-term, lowers taxable income, up to the $3,000 limit.
| Asset | Holding Period | Cost Basis | Market Value Upon Disposal | Capital Gain or (Loss) |
|---|---|---|---|---|
| XYZ Corp. common shares | 2 years | $3,000 | $3,700 | $700 |
| Examplium cryptocurrency | 2 years | $1,000 | $200 | ($800) |
| Examplium cryptocurrency no. 2 | 3 months | $500 | $800 | $300 |
| Examplium cryptocurrency no. 3 | 3 months | $500 | $400 | ($100) |
Again, your overall long-term gains and losses result in a $100 net loss.
On the short-term side, the $300 gain on Examplium 2 crypto offsets the $100 loss on Examplium 3, resulting in a $200 net short-term gain.
Offsetting this with the $100 long-term net loss leaves you with a $100 net short-term capital gain, which is taxable as regular income for 2022.
Conclusion
If you experienced crypto losses in 2022, you can potentially use them to reduce your tax liability.
Reporting gains or losses from cryptocurrency trades can be complex, especially in determining the cost basis.
The movement of tokens between wallets and trades involving different crypto types makes tracking acquisition costs challenging.
It’s advisable to consult a tax professional with crypto expertise for guidance, especially if you find the process overwhelming.