Are cryptocurrency losses tax deductible?
Yes, cryptocurrency losses are tax deductible. This question is timely as we near year end because conversations with clients tend to include tax-loss harvesting.
Tax-loss harvesting is the process of offsetting your gains with losses to try and minimize your tax liability.
To put this in perspective, if you have $100,000 in gains and you have $100,000 in losses in crypto you should sell your crypto to bring your tax liability down to $0.
Anytime you hold a loss in cryptocurrency, it’s in your interest to sell up to the extent that you have gains elsewhere.
What are the rules on cryptocurrency losses?
Because cryptocurrencies are relatively new the IRS hasn’t classified them as a traditional financial security yet. The rules are a little different.
The biggest instance of this is there are no “wash sale” rules for cryptocurrencies.
Why does a no “wash sale” period help you?
Let’s say you have losses in Bitcoin. With no “wash sale” period you can sell your position in Bitcoin and a minute later buy back the same Bitcoin. Functionally nothing changes other than missing out on a small window of price movement. However, you get to book that entire loss on your taxes.
Most people don’t know this because in traditional investments you need to wait 30 days before you can buy back a security you sell for a loss to avoid a “wash sale” where they disallow that loss. You can buy a different fund that has similar holdings, but it must be different to make sure you’re not buying back the same thing.
Crypto is different. You can buy back the same thing immediately after selling it for a loss.
This specifically pertains to cryptocurrency held directly and traded on exchanges. If you’re holding crypto through an ETF or mutual fund vehicle, that vehicle will have the same rules as traditional finance including honoring a 30 day “wash sale” period to realize any losses.
How do you report cryptocurrency transactions?
When it comes to reporting your crypto transactions, the IRS does want you to let them know what you’ve been doing.
There are a lot of tools that exist to help you report your crypto activity. Depending on the exchange you use, you can link that to a tool which will track your trades. Make sure whatever you use calculates your gains and losses. This will help you produce a file you can provide your accountant for filing with the IRS.
Final thoughts on booking cryptocurrency losses from Cooke Financial Group.
Our opinion is if you’re holding unrealized losses in cryptocurrencies that are not custodied in a brokerage account you should book those losses to offset any gains you have elsewhere.
Crypto losses can help you with other investment rebalancing. If there is a highly appreciated fund you would like to sell and you know you have additional losses in your crypto you can go ahead and book those losses and then sell your appreciated securities. The gains and losses will offset and eliminate current tax liability. Otherwise, you might pay taxes on gains you wouldn’t have needed to pay.
Remember, your goal is to zero out your gains and losses if possible in the current tax year. Good luck fully utilizing any crypto losses you might have in your crypto portfolio.
Registered Representatives of Sanctuary Securities, Inc. and Investment Advisor Representatives of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Cooke Financial Group is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.
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