Over the last couple of years there has been an increase in people investing in crypto, but with the current market we have also seen what some have called a “crypto winter” in 2022, where crypto prices remained substantially lower than prior peaks and led to widespread losses. Along with this environment, we have also seen some crypto platforms filing for bankruptcy.
If your crypto holdings were with a platform that has filed bankruptcy, you may be asking, “Can I get a tax break for my crypto losses?” The answer is maybe.
Don’t worry about being a crypto or bankruptcy expert. TurboTax is here for you and can help break down what you need to know if your crypto is involved in a bankruptcy proceedings.
What can I do if my crypto assets are frozen?
If you held crypto at an exchange that is involved in bankruptcy proceedings and your crypto assets are frozen, there may be claims made against the company and a bankruptcy court will eventually determine the distribution of assets if any are available. Typically if an asset could still potentially be recovered, you cannot take a loss on your taxes yet.
While you are waiting to find out if you will recover any of your crypto or whether the crypto will be deemed unrecoverable the best thing you can do is gather your documents related to your crypto account (CSV files, your trades, account balances, etc) to provide proof of the value of your crypto.
Can I get a tax break if my crypto is worthless?
Once a crypto company’s bankruptcy is settled and discharged and your crypto is deemed worthless, you can offset the loss of the crypto based on what you paid for it against your gains and offset any additional loss against ordinary income like wages up to $3,000. Any additional loss over $3,000 can be carried over to the next year.
Can I deduct my crypto loss as a casualty loss?
Prior to tax reform, taxpayers were able to deduct theft losses as a casualty loss if they could claim itemized deductions. Although some recent crypto losses may be a result of what seems like theft, tax reform changed casualty loss tax provisions and in general only allows deductions for losses caused by federally declared disasters unless the investment is considered a Ponzi scheme. If your crypto investment is ruled as a Ponzi scheme investment, then you may be able to deduct your loss as casualty loss if you itemize your tax deductions.
What tax break can I get if I had a crypto loss not related to bankruptcy proceedings, but due to selling the crypto for lower than I bought it for?
If you sold crypto for lower than what you purchased it for, you can offset the losing crypto against your capital gains and offset up to $3,000 of your net loss against ordinary income like wages. Any additional losses beyond the $3,000 can be carried forward to the next year. Like when selling losing stock investments, offsetting capital losses against capital gains or tax loss harvesting may save you money on your taxes.
Don’t worry about being a crypto or bankruptcy expert. With TurboTax Premier you can easily import up to 20,000 crypto transactions from your Digital Asset Exchange and Wallet. TurboTax Premier will help surface and guide you in how you might use any unrealized capital losses you may have from prior years, improving your tax outcome and lowering taxes owed. You can also meet with a TurboTax Expert specializing in crypto, who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right.
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