Are Cryptocurrency Losses Tax Deductible

On: April 17, 2020

Are cryptocurrency losses tax deductible? Talk about a timely question. Between June and November 2019, bitcoin prices dropped by nearly half. With a market share nearly three quarters of the entire market capitalization of all circulating cryptocurrencies, that’s dropped the price of altcoins in similar proportion. Even crypto investors, traders, and businesses that deal in crypto that didn’t buy while prices were high and sell-off in hurry to mitigate further losses still deal with a digital asset characterized by incredible price volatility. So despite the flood of retail and even institutional investors looking to make a big profit, it’s easy to lose money with crypto on your books. If you are an individual or run a business that has lost money on your acquisition of cryptos like bitcoin, bitcoin cash (satoshi’s vision, gold, et al) ether, ripple, cosmos, (etc.), the good news is that you absolutely can write off your cryptocurrency losses on your taxes. The same rules apply here as those applicable to capital losses on stocks. A few circumstances must obtain, however, to make a valid claim to a tax deduction on your crypto holdings. First you must have realized a capital loss on your crypto holdings. To realize a capital loss, you must have sold your crypto for cash, or spent it to buy something else, like another crypto currency, or some good or service. If the market value of the crypto in US dollars was lower at the time you sold it for cash (or spent it) than its market value at the time you acquired it (the cost basis), then you have realized a capital loss. But the crypto must be sold or spent to qualify as a capital loss. Simply buying bitcoin and finding the value of your bitcoin has dropped by 25% at the time your filed your taxes does not qualify as a tax-deductible loss if you are still holding the bitcoin at that time. You can deduct capital losses against capital gains. So if you realized a capital gain of $10,000 in 2019 from a well-timed purchase of bitcoin, but then you bought more bitcoin at the market peak, and later sold it at a loss of $10,000, the loss cancels out the gain. You would owe no taxes on your cryptocurrency trades for the year. Taxpayers can also deduct capital losses against other forms of income (such as wages from a job) up to $3,000 each year. So if you were to lose $13,000 on the purchase and sale of cryptocurrency in one tax year, after gaining $10,000, you could offset all of your capital gains, and deduct the $3,000 against income from your salary. One key rule here is that capital losses must offset capital gains first before they can be used to offset other kinds of income up to the $3,000 cap. If you have no capital gains and only sustained a loss of $10,000, you can write off $3,000 of those losses against other income. If you’re not sure whether your trades qualify as capital losses, consult Leading Tax Group.