By Nathan C. Goldman and Christina M. Lewellen
In July 2022, Bitcoin—the world’s most prominent cryptocurrency—plummeted below $20,000, a stark contrast to its November 2021 peak of over $68,000. While investors previously focused on taxing crypto gains, the recent downturn shifts attention to the tax implications of cryptocurrency losses.
How Cryptocurrency Is Taxed
Cryptocurrency is classified as a capital asset by tax authorities, akin to stocks or commodities like gold. Despite its "currency" label, crypto isn’t widely accepted for goods/services nor price-stable, aligning it more with speculative assets than traditional money.
Key Tax Principles
Gains/Losses: Calculated as the difference between purchase and sale prices.
- Example: Buying crypto for $30,000 and selling for $40,000 yields a $10,000 taxable gain.
- Selling for $20,000 instead results in a $10,000 capital loss.
Loss Limitations:
- Capital losses can only offset capital gains (not ordinary income).
- IRS Section 1211 allows a $3,000 annual deduction against ordinary income.
- Unused losses carry forward to future years.
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Strategies for Cryptocurrency Losses
If your crypto holdings are at a loss, consider these options:
1. Hold and Wait
- Crypto’s volatility means prices may rebound (e.g., Bitcoin’s 2021 swings: $61K → $31K → $68K).
- No tax is owed on unrealized losses.
2. Sell to Harvest Losses
- Tax Benefit: Deduct $3,000 annually against ordinary income.
- Example: A $12,000 loss saves $2,880 over four years ($720/year).
| Year | Taxable Income Without Loss | Tax Liability | Taxable Income With Loss | Tax Liability | Annual Savings |
|---|---|---|---|---|---|
| 2022 | $100,000 | $17,836 | $97,000 | $17,116 | $720 |
| 2023 | $100,000 | $17,836 | $97,000 | $17,116 | $720 |
| 2024 | $100,000 | $17,836 | $97,000 | $17,116 | $720 |
| 2025 | $100,000 | $17,836 | $97,000 | $17,116 | $720 |
| Total Savings | $2,880 |
- Wash Sale Advantage: Unlike stocks, crypto has no wash sale rules—you can repurchase immediately after selling to lock in losses.
3. Avoid Direct Donations
- Donating appreciated crypto avoids capital gains tax, but donating depreciated crypto forfeits loss deductions.
- Better Approach: Sell the crypto (claim the loss), then donate proceeds.
FAQs: Cryptocurrency and Taxes
Q1: Can I deduct more than $3,000 in crypto losses per year?
A: No. Capital losses exceeding $3,000 must be carried forward to offset future gains or income.
Q2: Does crypto’s classification as property affect taxes?
A: Yes. The IRS treats crypto as property, subjecting transactions to capital gains/loss rules—not currency exchange rules.
Q3: Are crypto losses deductible against ordinary income?
A: Only up to $3,000 annually. Additional losses offset capital gains in future years.
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Key Takeaways
- Capital Asset Status: Crypto is taxed like stocks, not currency.
- Loss Harvesting: Selling at a loss can yield long-term tax benefits.
- Strategic Donations: Sell depreciated crypto before donating to maximize deductions.
By understanding these principles, investors can navigate crypto downturns with informed tax strategies.