Can You Write Off Crypto Losses? US Tax Rules Explained

Yes: crypto losses are capital losses

Yes, US taxpayers may be able to deduct losses from cryptocurrency, but the loss usually cannot be treated like an ordinary business expense. Instead, crypto losses are capital losses. A capital loss means a loss from the sale or exchange of an investment or other asset, rather than a loss caused by the ordinary costs of running a business.

The IRS treats cryptocurrency as property under IRS Notice 2014-21. That classification matters when a taxpayer sells one crypto asset and receives less than the amount paid for it. It also matters when a taxpayer exchanges one crypto asset for another. In either situation, a loss can result when the value received is less than the taxpayer’s cost basis.

Cost basis is the amount used to calculate whether a sale produced a gain or a loss. The result is a capital gain when proceeds are greater than the cost basis and a capital loss when proceeds are less than the cost basis. Because crypto is property, a taxpayer cannot simply report the decline in the market value of an asset that has not been sold or exchanged.

This distinction is important. A crypto asset that has fallen in price may show a loss on a statement or dashboard, but that unrealized loss is not automatically a tax loss. The tax loss arises when the taxpayer completes a transaction that counts as selling or exchanging the property and the applicable tax calculation shows a loss.

The amount of the loss is also connected to the taxpayer’s other tax activity. If the crypto transaction produced a capital gain instead of a capital loss, the gain may offset eligible capital losses. If the crypto transaction produced a capital loss, it may be used under the rules described below. The taxpayer must still report the transaction even when the goal is to use its loss to reduce other gains or income.

How losses offset gains

Crypto losses first offset capital gains without limit. This means a taxpayer who has capital losses can use them against capital gains without applying the separate dollar limit that applies when losses reduce ordinary income. In practical terms, crypto losses can reduce the capital gains reported from crypto transactions, as well as eligible capital gains reported elsewhere.

Suppose a taxpayer has a capital loss from selling crypto and also has capital gains from another sale. The capital loss can offset the capital gain. If the capital losses are greater than the capital gains, the remaining amount becomes a net capital loss.

A net capital loss is different from the total of all individual losses. The calculation starts by considering capital gains and capital losses together. If losses exceed gains, the excess is the net capital loss that may be carried forward or, subject to the rules discussed below, used against ordinary income.

For example, if crypto losses exceed a taxpayer’s capital gains, the difference is not necessarily lost. It becomes a net capital loss. The taxpayer may use part of that amount against ordinary income, with the rest carried forward to later years. This means a crypto loss can have a tax effect even in a year when the taxpayer has little or no capital gain to offset.

The taxpayer should distinguish between the loss from each transaction and the final net capital loss for the tax year. Reporting every sale and exchange on Form 8949 helps establish those amounts. Schedule D then summarizes the results used in the tax return.

The $3,000 limit on ordinary income

In the US, net capital losses that exceed capital gains can reduce ordinary income up to $3,000 a year. If a taxpayer is married filing separately, the limit is $1,500. Ordinary income generally includes income from sources such as wages, while capital gains are generally treated separately.

This limit does not mean that only $3,000 of crypto losses can ever produce a tax benefit. It means that the portion of a net capital loss used against ordinary income is limited in a single year. Any amount not used because of that limit is carried forward to a later year rather than disappearing.

For instance, a taxpayer might have enough crypto losses to create a net capital loss larger than the annual ordinary-income limit. The taxpayer can use the allowed amount against ordinary income and carry the unused amount forward. In a later year, the carried-forward loss may offset capital gains, and it may also be available for the ordinary-income deduction under the same rules.

The deduction applies to net capital losses, not automatically to every crypto transaction that produced a loss. A taxpayer who has capital gains may use losses against those gains first. Only the remaining net capital loss is subject to the annual limit on reducing ordinary income. This is why the distinction between individual crypto sales and the overall tax-year result matters.

Carrying losses forward

Unused net capital losses carry forward to later years. A taxpayer does not need to identify one particular crypto transaction as the source of the deduction in a later year. The carried-forward amount is used in the later tax calculation under the capital-loss rules.

Keeping accurate records is essential because the taxpayer must report crypto sales and exchanges even when they create losses. For each transaction, the records should support the amount paid, the proceeds received, and whether the result was a gain or a loss. Digital statements, transaction histories, and records of transfers can help create a complete file, although the taxpayer remains responsible for the information reported on the tax return.

When reviewing a tax return, look for the reporting of capital gains and losses rather than only the reported profit from a crypto sale. A sale that appears to have produced a gain in one category may still be part of a larger net loss after gains and losses are combined. Likewise, a loss may contribute to a carryforward even if it could not reduce ordinary income in the year it occurred.

Carrying a loss forward does not mean waiting until the taxpayer has a gain from another crypto transaction. A carried-forward loss may offset eligible capital gains when they arise. If there is again more net loss than capital gains, the remaining amount can continue forward, subject to the ordinary-income limit in each relevant year.

Tax-loss harvesting and the wash sale question

Tax-loss harvesting is the general practice of realizing a tax loss so it can offset taxable gains. In the crypto context, this may involve a taxpayer selling or exchanging an asset at a loss and using the resulting capital loss to reduce capital gains or eligible net capital loss.

However, tax-loss harvesting must be considered alongside the wash sale rule. A wash sale generally arises under IRC section 1091 when a taxpayer sells a stock or security at a loss and later buys a substantially identical stock or security during the relevant period. The rule can defer the loss when that replacement purchase occurs.

The wash sale rule in IRC section 1091 applies to stocks and securities. As of 2026, it has not been extended to crypto by law, although bills to do so have been introduced. This means a taxpayer should not assume that the stock-and-security wash sale rule currently applies to cryptocurrency in the same way.

That legal distinction does not turn crypto harvesting into an unlimited deduction. The loss remains a capital loss, and the rules for offsetting gains, reducing ordinary income, and carrying unused losses forward still apply. The taxpayer must also report the transaction that created the loss.

Because proposed legislation can change the legal landscape, a taxpayer considering a crypto sale specifically for tax-loss harvesting should check the law that applies when the transaction occurs. Tax-loss harvesting should not be viewed as a reason to make a transaction without understanding its reporting consequences, and it is not appropriate to buy or sell any particular asset merely because of a prediction about its price.

Reporting losses: Form 8949 and Schedule D

US taxpayers report sales of crypto on IRS Form 8949 and summarize them on Schedule D. Form 8949 is where the individual sales and exchanges are reported, including the resulting gains or losses. Schedule D brings the reported results together with other capital gains and capital losses for the tax year.

A taxpayer should not wait for a broker statement to report every detail before preparing the return. The taxpayer must review the crypto activity reported by brokers and other relevant records, reconcile that activity with the taxpayer’s own files, and correct any mismatch. This review is especially important when a sale produced a loss because the loss is part of the capital-loss calculation.

The process begins with collecting transaction records for sales and exchanges during the tax year. The taxpayer then identifies the reported gains and losses and enters them on Form 8949. Schedule D summarizes the capital-loss result. If capital losses exceed capital gains, the return reflects the permitted ordinary-income deduction and any loss carried forward.

Reporting a loss does not mean that the taxpayer may claim the entire amount against ordinary income. Form 8949 and Schedule D help show the result of individual transactions and the net capital loss. The separate limit on using net capital losses against ordinary income still controls how much can be deducted in the current year.

Form 1099-DA and your records

Starting with sales on or after January 1, 2025, crypto brokers report gross proceeds to the IRS on Form 1099-DA. Gross proceeds are the amounts received from the sales covered by the form, without using the taxpayer’s cost basis to reduce those reported amounts.

Cost basis reporting for covered assets begins with the 2026 tax year. This distinction matters because a form showing gross proceeds does not necessarily present the complete gain-or-loss result for each covered sale. Taxpayers should compare broker information with their own records rather than treating Form 1099-DA alone as a finished statement of the tax loss.

Useful records include the date of each sale or exchange, the asset involved, the amount received, and the amount paid or otherwise used as cost basis. The taxpayer should also retain records that explain transfers between services and accounts so that all reportable activity can be matched. A complete set of records makes it easier to identify omissions, duplicate reporting, or transactions that need further review.

The taxpayer remains responsible for reporting sales of crypto on Form 8949 and summarizing them on Schedule D, even when a broker provides information to the IRS. Form 1099-DA is an important source for checking gross proceeds, but it should be treated as part of a broader records review rather than the only source used to determine every gain or loss.

When to get professional help

Professional tax help can be useful when the taxpayer has many crypto transactions, records from several sources, or difficulty reconciling broker forms with personal records. It can also be valuable when capital losses exceed capital gains, when a carried-forward loss needs to be applied, or when the taxpayer is unsure how to report an exchange or sale.

A tax professional can review whether transactions have been reported correctly, whether Form 8949 and Schedule D reflect the available information, and whether the ordinary-income limit and carryforward have been applied properly. The taxpayer should provide the relevant forms and a complete transaction history so the review covers both reported proceeds and cost basis.

Help is also sensible when the taxpayer’s circumstances involve questions that are not answered by a general explanation, including ambiguity in the records or uncertainty about the law applicable to a particular transaction. A professional can also explain the effect of pending legislation on wash sale treatment without assuming that a proposal has become law.

Professional assistance does not transfer responsibility for the accuracy of the return from the taxpayer. The taxpayer should still understand which assets were sold or exchanged, review the resulting gains and losses, and confirm that Form 8949 and Schedule D agree with the records. No one can use a crypto loss to avoid reporting the sale, and no one should claim more than the applicable capital-loss rules permit.