How to Deduct Crypto Losses from Your Taxes

March 27, 2025
How to Deduct Crypto Losses from Your Taxes

Introduction

Cryptocurrency markets are highly volatile, and many investors experience losses when selling or trading digital assets. The good news is that crypto losses can be deducted from taxable income, reducing overall tax liability. Whether through selling at a loss, experiencing theft, or losing access to funds, understanding how to properly report and deduct these losses is essential for maximizing tax benefits and ensuring compliance.

 

This article explains how to deduct cryptocurrency losses, the IRS rules for reporting losses, and strategies to optimize tax savings.

 

1. How Crypto Losses Are Treated for Tax Purposes

  • The IRS and CRA classify cryptocurrency as property, meaning gains and losses are treated as capital gains and losses rather than ordinary income.
  • Crypto losses are deductible when:
    • Selling crypto for less than its purchase price.
    • Trading one crypto for another at a loss.
    • Spending crypto at a lower value than its acquisition cost.
  • Crypto held but not sold does not qualify for a deduction, even if its value drops significantly.

 

2. Reporting Crypto Losses on Tax Returns

United States (IRS Rules)

  • Crypto losses are reported on Form 8949 and Schedule D.
  • Each transaction must include:
    • Date of acquisition and sale
    • Sale price and original purchase price (cost basis)
    • Total gain or loss per transaction
  • Short-term losses (held ≤1 year) offset short-term gains (taxed as ordinary income).
  • Long-term losses (held >1 year) offset long-term gains (taxed at capital gains rates of 0%, 15%, or 20%).
  • If total losses exceed gains, up to $3,000 in losses can be deducted from ordinary income per year.
  • Unused losses can be carried forward indefinitely to offset future gains.

Canada (CRA Rules)

  • Crypto losses are reported on Schedule 3 (Capital Gains or Losses Statement).
  • 50% of the capital loss can be used to offset taxable capital gains.
  • Unused losses can be carried forward indefinitely or carried back up to three years to offset past capital gains.

 

3. Wash Sale Rule Considerations

  • The IRS does not currently enforce the wash sale rule on crypto, meaning investors can sell at a loss and immediately repurchase the same asset without penalty.
  • However, new tax regulations may introduce stricter rules, so monitoring legislative updates is crucial.

 

4. Lost or Stolen Crypto – Can It Be Deducted?

  • Theft or hacking losses are no longer deductible under U.S. tax laws after 2017 tax reforms.
  • Lost private keys or inaccessible wallets generally do not qualify as deductible losses unless there is a documented and irreversible loss of access.

 

5. Tax-Loss Harvesting Strategy

  • Investors can use tax-loss harvesting to strategically sell underperforming assets to offset gains.
  • Example:
    • An investor has $10,000 in crypto gains but also has $7,000 in unrealized losses.
    • Selling the losing asset locks in the $7,000 loss, reducing the taxable gain to $3,000, resulting in lower taxes.

 

6. Steps to Deduct Crypto Losses Efficiently

  • Keep detailed records of all transactions, including dates, values, and costs.
  • Use crypto tax software (e.g., Koinly, CoinTracker) to simplify calculations.
  • Ensure all losses are properly categorized and reported to the tax authorities.

 

Conclusion

Crypto investors can deduct losses to offset taxable gains and reduce overall tax liability, but proper reporting is crucial. By tracking losses, using tax-loss harvesting, and applying carryforward rules, investors can optimize their tax position. 

Tax Partners can assist in structuring crypto tax strategies, ensuring compliance while maximizing deductions.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

 

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