Crypto Tax Losses: 6 Rules for Claiming Losses on Your Tax Return

6 Rules for Claiming Crypto Losses on Your Tax Return

Claiming crypto losses on your tax return is the one part of crypto taxes that people get excited about, and it is also where the sloppiest work happens. A red number in a portfolio app is not a deduction. It is a screenshot.

The rules that turn a loss into a deduction are ordinary tax rules, applied to an asset class that generates far more transactions than the rules were designed for. Here is the short version, and then the six rules that decide whether your loss survives.

The short answer: the IRS treats digital assets as property. A loss counts when you actually dispose of the asset, it offsets capital gains first, only $3,000 a year can offset ordinary income, and the rest carries forward. Getting there requires accurate basis for the specific units you sold.

1. The Wash Sale Rule Currently Reaches Securities, Not Property

The wash sale rule in IRC section 1091 disallows a loss when you sell a stock or security at a loss and buy a substantially identical one within 30 days before or after. Because the IRS classifies digital assets as property rather than securities, that rule has generally not applied to a straight crypto position.

That is why selling and rebuying is common practice among crypto investors while it is prohibited for stocks.

Two cautions. First, this is a policy that lawmakers have repeatedly proposed changing, so treat it as current law and not permanent law, and check the state of play before you plan around it. Second, if you hold tokenized instruments that are securities, or you trade through a structure that holds securities, the analysis is different. Do not assume the whole wallet is outside section 1091.

2. A Loss Is Not Real Until You Dispose of the Asset

Unrealized losses do nothing on a tax return. Under IRC section 1001, you need a realization event: a sale for cash, a swap into another token, or spending the coin on goods and services.

That last one surprises people. Paying for something with appreciated or depreciated crypto is a taxable disposition of the coin, not just a purchase.

Moving coins between your own wallets is not a disposition, and neither is posting collateral in most straightforward cases. The line matters because a year of transfers can look like hundreds of trades to software that does not know the wallets are yours.

3. Losses Offset Gains First, Then $3,000 of Ordinary Income

The ordering rules are unglamorous and they decide the size of your refund.

Capital losses first offset capital gains of the same character, short-term against short-term and long-term against long-term, then across categories. If losses remain, IRC section 1211(b) allows up to $3,000 per year against ordinary income for individuals, $1,500 if married filing separately. Whatever is left carries forward indefinitely under section 1212(b).

The practical consequence: a $180,000 net loss does not produce a $180,000 deduction. If you have no gains, it produces $3,000 this year and a long carryforward. Investors planning a large sale often care more about the carryforward than the current year number.

4. Worthless, Abandoned, and Stolen Coins Are a Harder Deduction

"The token went to zero" is not the same as "I sold the token."

A worthlessness or abandonment deduction under IRC section 165 requires more than a dead chart. The IRS Office of Chief Counsel addressed this in a 2023 memorandum involving a token that had lost nearly all value but still traded and was still held, and concluded that neither worthlessness nor abandonment applied because the taxpayer retained ownership and the asset had some value. Chief Counsel advice binds no one but it tells you how the agency thinks.

Theft losses are narrower still. For individuals, the personal casualty and theft loss deduction is sharply limited for tax years 2018 through 2025 except for federally declared disasters, with a separate analysis for losses in transactions entered into for profit.

The workable path is usually a disposition: sell or otherwise dispose of the position for whatever it is worth, even if that is a fraction of a cent, and take a normal capital loss. Talk to a professional before you rely on an abandonment position.

5. Per-Wallet Basis Decides Which Lot You Actually Sold

Since Rev. Proc. 2024-28, taxpayers have been expected to track basis on a wallet-by-wallet and account-by-account basis rather than pooling everything into one universal average. That procedure gave a safe harbor for allocating existing unused basis to specific wallets as of the start of 2025.

This changes your loss more than most people expect. If your software was pooling every unit you ever bought, the lot it thinks you sold is probably not the lot you actually sold, and the loss it reports is wrong in both directions across a year.

Add the broker reporting layer on top. Form 1099-DA reporting for digital asset sales through custodial brokers means the IRS now receives its own version of your proceeds. Any mismatch between their number and yours becomes a notice, and notices arrive years later when the records are hardest to rebuild.

6. Documentation Is What Survives a Question, Not Your Explanation

If you claim a loss, assume you will one day need to show the units, the acquisition dates, the acquisition cost, the disposition date, and the proceeds. That means exported transaction histories per wallet and per exchange, kept for as long as the return is open.

It also means being honest about economic substance. Selling at a loss and buying back moments later, in a pattern designed only to book losses with no change in your position or risk, is exactly the fact pattern a reviewer looks at hardest. A defensible loss looks like a real decision.

Crypto Tax Made Easy is a Sam's List partner that does this reconstruction work specifically. It is a crypto-native firm founded in 2021 and based in Little Silver, New Jersey, working with clients nationwide, and its stated specialty is reconciling wallet and exchange data across DeFi, staking, and cross-chain activity into a tax-ready report. That is the right kind of firm when the problem is thousands of transactions rather than a single Schedule D line. As with any engagement, the outcome depends on the quality of the data you can produce, and a reconciliation cannot create records that never existed.

If your losses are large enough to matter, get the basis right before you decide how much of a deduction you have. You can compare crypto-focused accountants by specialty and client reviews in the Sam's List accountant directory.

Frequently Asked Questions

Can I sell crypto at a loss and buy it back immediately? Under current law the wash sale rule in IRC section 1091 applies to stocks and securities, and the IRS treats most digital assets as property, so a buy-back has generally not disallowed the loss. This is a frequent target for legislative change, and other doctrines can still apply, so confirm the current rules before planning around it.

How much crypto loss can I deduct in a year? Losses offset capital gains without a dollar limit. Beyond that, individuals can deduct up to $3,000 of net capital loss against ordinary income per year, or $1,500 if married filing separately, and carry the remainder forward indefinitely.

What if my coin went to zero or the exchange collapsed? A dead price is not automatically a deductible loss. Worthlessness and abandonment under section 165 are narrow, and theft losses for individuals are limited for 2018 through 2025. Disposing of the position and taking a capital loss is usually the cleaner route, but the facts matter, so get advice.

Do I have to track basis separately for each wallet? Yes. Rev. Proc. 2024-28 directs taxpayers to track basis by wallet and account rather than pooling universally, with a safe harbor for allocating unused basis as of the start of 2025. Per-wallet tracking also lines your records up with broker reporting on Form 1099-DA.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.