Last year was a disaster for cryptocurrencies.
Crypto was stressed even before the demise of FTX and other cryptocurrency exchanges that have since declared bankruptcy. The FTX scandal capped a disastrous 2022 for many investors, prompting them to cut their losses in cryptocurrencies such as Bitcoin and Ethereum.
As tax season approaches, you may be wondering if you can deduct those losses from any capital gains you made during the year. Or, if you were fortunate enough to profit from investing in crypto or crypto-related assets, you may be wondering if you must report your earnings to the Internal Revenue Service.
Do you have to report cryptocurrency on your taxes?
Taxpayers must report “all digital asset-related income” on their 2022 federal income tax return, according to the IRS. According to the IRS definition, digital assets include not only cryptocurrency but also non-fungible tokens (NFTs) and stablecoins.
You must answer “yes” or “no” to the following question on your 1040 tax form, which is used to report individual income:
“Did you receive (as a reward, award, or payment for property or services) or sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset) during 2022?”
According to the IRS, if you kept a digital asset in 2022 but didn’t buy more of it, sold any of it, or transferred it to another account, you don’t have to answer yes.
However, if you sold any digital assets, whether for a loss or a gain, you must answer yes and use form 8949 to record your capital gain or loss. If you acquired any new digital assets during the year, you must also check the box and fill out the form. This could include digital assets you received as compensation in 2022.
Form 8949 will be used to record any transactions for assets that may result in a capital gain or loss. This includes digital assets, stocks, bonds, and other financial instruments. So, if you purchased Bitcoin at any point in 2022, you must record it on the form. Similarly, if you sold any Bitcoin during the year, you must document it on the form.
The form is divided into two sections: transactions involving short-term capital assets and transactions involving long-term capital assets. Short-term capital assets are those held for less than a year and are taxed more heavily than long-term assets.
Should I file Schedule D or Form 8949?
If you only acquired new capital assets last year and did not sell any assets in 2022, you may only need to fill out form 8949. However, if you sold any assets, you must complete Form 8949 and Schedule D.
Can you deduct cryptocurrency losses on your taxes?
Yes, but there are constraints.
As with any capital asset, you can deduct up to $3,000 in capital losses per year, or $1,500 if married and filing a separate return. Alternatively, if you had no gains, you can deduct $3,000 from your ordinary income.
If your total losses exceeded $3,000, you can carry them forward indefinitely to apply to future tax returns.