Lightening your crypto tax load: How to report crypto losses on taxes

Volatility is the price of admission in the cryptocurrency market. While the gains are thrilling, losses are an inevitable part of the experience, whether from price drops, hacks, bankruptcies, or theft. 

Taking a financial hit is never ideal, but there are ways to use these losses to your advantage and reduce your tax liability. Fortunately, under certain IRS rules, taxpayers may offset their capital gains or, in limited cases, ordinary income, if they report their crypto losses correctly. 

It all starts with understanding how to report crypto losses on taxes so you don’t pay more than necessary.

In this guide, we’ll walk through how to identify, calculate, and report different types of crypto losses; from everyday trading losses to theft, scams, or bankrupt exchanges.

Capital losses in crypto

The goal of any tax write-off is to claim deductions for yearly losses. In crypto, capital losses are the most common reason for deductions.

What are capital losses in crypto?

A capital loss in crypto happens when you sell a digital asset for less than what you invested in it. The loss is the difference between the amount you received from the sale (your amount realized) and your cost basis, what you originally paid for the asset, including any related fees.

Do I have to report crypto on taxes if I lost money? 

Anytime you sell, exchange, or otherwise dispose of cryptocurrency, it triggers a taxable event. Even if the transaction results in a loss, it must still be reported on your tax return. 

The good news? Reporting losses can work in your favor. Since crypto losses are tax-deductible capital losses, they can help lower your taxable income. 

Under current IRS rules, you can claim crypto capital losses on taxes to offset capital gains from other investments. If you end up with a net capital loss across all assets, you may deduct up to $3,000 per year against ordinary income, with any excess carried forward to future tax years.

How to report crypto losses on taxes

Taxpayers report all crypto-related capital gains and losses on Form 8949, listing each disposition and the resulting gain or loss. The totals from Form 8949 are then carried to Schedule D (Form 1040), where short-term and long-term gains and losses are netted within their categories and then combined to determine the taxpayer’s overall net capital gain or loss.

Example:

• You have a $5,000 short-term crypto gain and a ($12,000) short-term crypto loss.
• You also have an $8,000 long-term stock gain and a ($2,000) long-term crypto loss.
• Step 1 - Net short-term results: $5,000 + ($12,000) = ($7,000) net short-term loss.
• Step 2 - Net long-term results: $8,000 + ($2,000) = $6,000 net long-term gain.
• Step 3 - Combine both totals: ($7,000) short-term loss and $6,000 long-term gain = ($1,000) net capital loss.

Result: You’ll report a $1,000 net capital loss on your return for the year.

How cost basis affects your crypto losses

The amount of gain or loss you report on your tax return depends on your cost basis, the amount you originally paid for the asset, including fees.

When multiple units of the same cryptocurrency are held, the units you dispose of are determined by your chosen lot relief method, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or Highest-In, First-Out (HIFO).

Example:

You hold three BTC purchased at different prices and sell one later in the year:

• 1 BTC bought for $25,000 (January)
• 1 BTC bought for $35,000 (March)
• 1 BTC bought for $30,000 (June)
• Later, you sell 1 BTC for $20,000

Here’s how the result differs depending on your cost-basis method:

• FIFO: $20,000 – $25,000 = $5,000 loss
• LIFO: $20,000 – $30,000 = $10,000 loss
• HIFO: $20,000 – $35,000 = $15,000 loss

Each method produces a different deductible loss amount, affecting both your current-year tax outcome and future capital-loss carryforwards. Apply your chosen method consistently, and maintain detailed records to substantiate your calculations.

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Other types of crypto losses

Not all crypto losses come from selling assets at a loss. Some arise from events like theft, scams, or failed exchanges. These situations fall under different sections of the tax code and may qualify for deductions if specific IRS criteria are met.

Deductibility of personal losses under the current tax code

Claiming personal crypto losses isn’t as straightforward as reporting capital losses, especially after the Tax Cuts & Jobs Act (TCJA) of 2017. Initially under the TCJA and now permanently under the 2025 One Big Beautiful Bill Act (OBBBA), personal casualty losses are deductible only if they result from a federally or state-declared disaster, for tax years beginning after December 31, 2025. This means that personal theft losses, such as lost wallets, hacks, or scams, are now permanently nondeductible unless they are directly connected to a declared disaster.

However, some crypto losses may still qualify for deduction if they stem from profit-motivated or investment-related activity, such as exchange failures or fraudulent investment schemes. In these cases, the IRS expects clear, verifiable documentation showing how the loss occurred, proof of ownership, and evidence of value at the time. Maintaining detailed records through crypto-tax software like CoinTracker and consulting a qualified crypto CPA are essential steps for substantiating any potential deduction. 

Casualty losses for profit-driven transactions

A casualty loss results from the sudden, unexpected, or unusual destruction of property, as defined under IRC §165(c)(2) for “transactions entered into for profit.” While this provision technically allows deductions for nonbusiness losses, applying it to digital assets is difficult because cryptocurrency cannot be physically destroyed in the traditional sense. Even when a crypto exchange collapses or files for bankruptcy, the underlying assets still exist on the blockchain, just beyond the user’s reach.

In Smith v. Commissioner, T.C. Memo 1979-76, the court denied a casualty loss claim from a depositor whose credit union failed, ruling that the depositor and institution shared a debtor–creditor relationship. The same logic generally applies to crypto exchanges: users are creditors, not owners of specific property that was destroyed. Accordingly, such losses fall under the bad debt provisions of IRC §166, not casualty loss rules.

Even if a taxpayer could argue for casualty treatment, they must show the loss was sustained in the year of the event and that there’s no reasonable prospect of recovery through bankruptcy or legal claims. If claimed, casualty losses are reported on Form 4684, Section B, Part 1, with allowable amounts flowing to Schedule A, line 16 as “Other itemized deductions.”

How to deduct theft losses from crypto transactions

Under Reg 1.165-8(d), theft includes (but is not limited to) crimes such as larceny, embezzlement, and robbery. Individuals and businesses may deduct theft losses that meet the requirements of IRC 165(c)(2): the transaction must have been entered into for profit. This rule covers losses from stolen or misappropriated digital assets when the activity was investment, or business related, not personal.

In March 2025, the IRS Office of Chief Counsel (CCM 202511015) reaffirmed that theft-loss deductions under §165(c)(2) require both a profit motive and proof that no reasonable prospect of recovery exists at the time the loss is claimed. The memo distinguished between investment-motivated thefts, such as fraudulent trading or “pig butchering” schemes, which may qualify for deduction under §165(c)(2), and personal-use thefts, such as romance or kidnapping scams, which do not.

The OBBBA permanently disallowed personal casualty losses not in connection to a Federal or State declared disaster under §165(h), but for-profit thefts remain deductible under §165(c)(2) if the taxpayer can prove both a profit motive and no reasonable prospect of recovery.

What is a "transaction entered into for profit"?

Whether a crypto transaction qualifies as “for profit” depends on facts and prior case law. Investors who trade, stake, or otherwise use digital assets to generate income can generally demonstrate a profit motive, but the IRS evaluates each claim individually. Those claiming theft deductions must provide sufficient evidence that their transactions were profit-driven, and maintain robust documentation, such as proof of ownership, acquisition cost, theft evidence, and recovery efforts. 

When and how to claim the deduction

• Timing: Theft losses are deductible in the year discovered. If recovery is possible through insurance or legal action, taxpayers must wait until the asset is proven wholly unrecoverable before claiming the loss.
• Reporting: Theft losses are reported on Form 4684, Section B, Part I. The allowable amount flows to Schedule A, line 16 under “Other itemized deductions.” Only taxpayers who itemize can benefit.

Ponzi scheme losses in crypto taxes and IRS safe-harbor rules

Fraudulent crypto projects occasionally operate as Ponzi-type schemes, where new investor funds are used to pay earlier participants instead of generating real profits. Investors who lose assets to such schemes may be eligible for a theft-loss deduction under IRC §165(c)(2) if the investment was entered into for profit.

The IRS addressed these cases in Rev. Rul. 2009-9 and Rev. Proc. 2009-20, which established an optional safe-harbor method for victims of qualified fraudulent investment arrangements. The IRS Office of Chief Counsel Memorandum 202511015 reaffirmed that this safe harbor applies only to a “specified fraudulent arrangement” where the scheme’s lead figure has been formally charged by indictment or information under state or federal law, or where an official complaint, receivership, or trustee appointment confirms the fraud.

In other words, the safe-harbor deduction is not available for ordinary scams or exchange failures unless they meet these formal legal criteria. Qualifying taxpayers may claim the loss in the year of discovery once it is clear no recovery is possible.

Calculating and reporting the loss

• Compute the qualified investment by adding your initial and subsequent investments and any previously reported income, then subtracting all withdrawals.
• Multiply the result by 95 % (or 75 % if potential third-party recovery exists). Subtract any insurance reimbursements or recoveries.
• Report the deduction on Form 4684, Section C. The allowable portion flows to Schedule A, line 16, and benefits only those who itemize deductions.

Because Ponzi-scheme deductions involve complex substantiation and safe-harbor elections, taxpayers should work with a crypto-experienced CPA to ensure the claim meets IRS requirements.

Worthless or abandoned crypto

A loss due to a worthless cryptocurrency isn’t generally deductible until there’s a realization event, such as a sale, exchange, or other disposition of the asset. Merely holding a token that has lost market value does not create a deductible loss. Because cryptocurrency is treated as property, not a security, most tokens do not qualify for a “worthless security” deduction under IRC §165(g). Only assets that meet the SEC’s definition of a security token could potentially qualify.

If tokens can still be sold or exchanged, even for a nominal amount, that transaction establishes the realization needed to claim a capital loss. If the asset has no liquidity or viable market, taxpayers may instead treat the loss as an abandonment once the property is permanently discarded and has no potential for recovery.

Under Reg 1.165-2, taxpayers may claim an abandonment loss for property used in a trade, business, or profit-motivated activity when its usefulness ends and it is permanently discarded. In simple terms, you may have an abandonment loss if you can answer “yes” to all the following:

1. Did you invest in the cryptocurrency with the intention of making a profit?
2. Did the cryptocurrency lose its value?
3. Is it a non-depreciable property? (Yes: all cryptocurrencies are non-depreciable.)
4. Did you permanently discard the coins, such as by sending them to a null (burn) address?

If all of the above apply, the loss may qualify as an abandonment loss. Taxpayers should maintain documentation showing proof of ownership prior to abandonment, intent to abandon, and the specific act of abandonment, consistent with the three-prong test applied by the tax courts.

How to report abandonment losses

Abandonment losses are reported on Form 4797, line 10, and the deductible amount equals the asset’s adjusted basis at the time of abandonment. These losses are generally treated as ordinary losses, not subject to the $3,000 capital-loss limitation. Detailed records and supporting evidence are crucial, as the IRS evaluates each claim based on the facts and circumstances of the case.

Nonbusiness bad debt deductions for crypto

Under IRC 166(d)(2), a nonbusiness bad debt arises when a loan or deposit made to another party becomes wholly worthless. In the crypto context, this can occur when funds held on an exchange or lending platform are lost and the platform enters bankruptcy. In these cases, account holders are typically treated as unsecured creditors.

To qualify, taxpayers must demonstrate that the debt is entirely uncollectible, with no reasonable chance of repayment despite good-faith efforts to recover funds. Partial losses don’t qualify. Nonbusiness bad debts are reported as short-term capital losses on Form 8949, Part I, Box C, in the tax year the debt becomes worthless. Supporting documentation should be retained to substantiate the claim.

Reporting crypto losses on your tax return? CoinTracker can help

The easiest way to track and report your crypto gains and losses is with CoinTracker. 

CoinTracker's Portfolio Tracker provides a complete view of your transaction history and a summary of your tax obligations. CoinTracker also automatically organizes this data into IRS-compliant forms, ready to share with a crypto CPA or import into tax platforms like TurboTax. With CoinTracker’s tax-loss harvesting tool, you can plan when to sell digital assets to minimize your tax liability.

Get started with a free account today to discover how CoinTracker can minimize tax season stress and maximize your returns.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.