Can You Write Off Crypto Losses on Taxes?

Crypto Losses on Taxes

The NFT (non fungible tokens) and cryptocurrency booms have pushed the markets to dizzying heights and devastatingly lows. Was once a great investment, but now it seems to be in decline. Some people are even considering leaving the crypto market. A loss is a bad thing. Crypto investors may wonder if they are able to deduct crypto losses from their taxes. The answer is a resounding yes. The losses on NFT’s and cryptocurrency can be deducted from income tax or used to offset capital gains.

When can you write off losses?

The IRS currently treats cryptocurrency, NFT and other digital assets, collectively known as “crypto”, as property. This is the same for any stock. The value of a crypto only becomes taxable after it is traded, sold or spent. For a coin or NFT to be eligible for a tax write-off, it must have been sold, traded or spent with a loss. Tax write-offs are not available if you simply hold crypto that’s lost value. The IRS does not look favorably on a tactic that involves selling currency at a profit and then buying it back. This is called a “wash sale” and is frowned upon.

How Do You Write Off Crypto Losses on Taxes?

You will need to report the loss you have made on crypto assets by using the Forms 1040 Schedule D and Form 8949, Sales and other Dispositions.

All of these forms require that you list the initial or basic price of your cryptocurrency. An example of a typical NFT transaction may look like this:

1. Buy 1 Ethereum (ETH), at $1,500, plus $5 in transaction fees.
2. Buy NFTs for 1 ETH instantly.
3. Sell the NFT at a later date for.5 Ethereum
4. 5 ETH to USD. ETH now trades at $1000.

The initial price for the ETH is the basis to be used, as well as the price at which the NFT sold. Any loss in value can be written off because each transaction is a taxable event. If the ETH transactions occurred directly before and immediately after the sale, then it is likely that both the NFT purchase and the final conversion from ETH to USD would be considered capital gains. (Because an asset was exchanged or sold for profit.) The sale of NFT however will most likely be considered a Loss.

You can then determine whether you are eligible to claim crypto losses as a tax deduction. You could offset capital gains if you made a profit, like in the example above. Crypto losses can be used to offset capital gains. You can use your losses to offset up to $3,000 of your personal income if your losses in general capital outweigh your gains. If you have losses that exceed $3,000, they can be carried forward and used in future tax years.

Conclusion

Losing money on an investment can be a very stressful experience. Losses in crypto can be written off, just like other investments. Tenina Law offers Tax Planning Services that can assist individuals and businesses in navigating the complexity of the Internal Revenue Code as well as local tax laws. Contact Tenina Law by phone or online at 213-596-0265 for a free consultation.

This article was written by Alla Tenina.  Alla is one of the best tax attorneys in Los Angeles California, and the founder of Tenina Law. She has experience in bankruptcies, real estate planning, and complex tax matters. Visit here for more information. The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.