Do you have crypto losses from trading? Have you lost money on some trades but profited from others?
You can actually gain from crypto losses when having the right tax optimization strategies in place.
Discover how to determine which losses you have and what legal ways you can use to reduce your gains and pay fewer taxes.
In this article:
How to calculate crypto losses
You can determine your crypto losses by subtracting the cost basis of the crypto you acquired from the total sales proceeds of your trade.
If you paid a trading fee, the fee could be deducted from the sales proceeds. If you have a loss, that means your sales proceeds are lower than your cost basis, usually because the price of your coin went down.
Should I report losses on crypto?
Yes, in the US, you must report your crypto gains and crypto losses regardless of the amount of gains/losses. If you have losses from crypto trading, you’ll have to report them on Form 8949 and Schedule D of Form 1040.
The top 5 ways to gain from your crypto losses
1. Offset gains with crypto losses
The first advantage of having some crypto losses is that you can legally use them to lower your capital gains and effectively pay fewer taxes.
According to IRS rules, you can deduct your capital gains by using your capital losses. If you have any remaining losses after offsetting all your gains, you can deduct an additional net loss of up to $3,000 for the year.
2. Don’t have gains? Carry the losses for future years
If you do not have gains from crypto trading, you can claim a net loss deduction of $3,000 in the current tax year.
If you have more than $3,000 in losses, you can carry the remaining over to the following years until you fully utilize all the losses.
3. Crypto tax loss harvesting
If you have a lot of capital gains from crypto trading and you start to realize that you’ll have a big tax bill coming next year, crypto tax loss harvesting may be an option.
Do you have a coin in your portfolio that has lost most of its value, and you don’t believe it will recover in the short or medium term?
In that case, you may want to realize the loss from that coin and use that loss to offset your gains from your other trades, effectively reducing your tax bill.
4. Wash sale rule
You’ll be able to get around the wash sale rule for crypto trades. What is the wash sale rule?
It’s when you sell a coin for a loss and buy back substantially the same coin within 30 days before or after the sale, reinitiating the holding period as it is a new trade.
By not having the wash sale rule, you can sell for a loss, buy back the coin, claim the loss that you just had, and reduce your other gains.
5. Reporting crypto losses on your taxes
In the US, you have to report your crypto losses on your trades the same way you would report your crypto gains.
On Form 8949, you’ll have to report each trade where you have a loss with the usual information: cost basis, sales proceeds, date of acquisition, date of sale, and loss on the trade.
You’ll also have to include your crypto losses on Schedule D of your Form 1040 (the US Individual Income Tax Return). If you have bought and sold crypto during the tax year, you’ll also have to answer “Yes” to the crypto question on top of page 1 of Form 1040.
How to file crypto losses on TurboTax
After reporting your crypto losses with the help of crypto tax software like CoinTracking, you can use the integrations like TurboTax to export your forms with the losses and then import them on TurboTax and file your taxes.
Please check this guide with all the steps on exporting your crypto losses from CoinTracking and importing them into TurboTax.
How to import your crypto gains into TurboTax
The best crypto tax software: CoinTracking
The best crypto tax software in the market is CoinTracking.
You can import your trades using CSV or API, track your gains/losses, and generate tax reports according to your preferred accounting method.
CoinTracking is your full crypto tax solution for:
DeFi and NFT support with our ETH+DEX importer.
Importing your Binance Chain, Binance Smart Chain, and MATIC transactions.
25+ advanced reports, including which coins offer you a tax-free rate.
Automatic capital Gains, according to 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB), accepted worldwide.
Generating complete Tax Reports in your country.
Moreover, CoinTracking can easily classify all your earnings from yield farming, liquidity pools, crypto staking, and much more.
Crypto taxes with no errors: CoinTracking Full Service in the US.
CoinTracking also offers a Full Service for US traders. A crypto reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
Do you have any crypto tax questions? Check the best guides:
How are rebase token protocols taxed?
Do you pay taxes on fan tokens?
Do you pay taxes when trading stablecoins?
How is Yield Farming Taxed?
DeFi Taxes: The Complete Guide.
How to save taxes with a Bitcoin IRA.
Do you pay taxes for receiving Bitcoin tips?
Uniswap Taxes Guide
How to calculate taxes with Bitcoin dollar-cost averaging?
FIFO for crypto taxes? Implications of accounting methods.
NFT Taxes: The Complete Guide.
Is Bitcoin taxable? The ultimate guide for 2021 taxes.
This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 35+ AMA crypto tax reports for free.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.