Cryptocurrency Tax Losses May Be Subject to a $3,000 Cap
Dramatic losses in digital wallets should be accounted for on tax returns. However, even the IRS appears unsure of how to treat these losses for tax purposes, although they have given some limited guidance on the matter.
The standard rule for capital losses dictates that losses are typically capped at $3,000 annually, with any remaining losses carried forward to subsequent tax years. However, holders of cryptocurrency coins that have significantly depreciated may consider “abandoning” their holdings, where abandonment losses are not subject to the $3,000 limit on capital losses.
Determining whether a cryptocurrency coin qualifies as “almost worthless” versus “worthless” is contentious; currently, there is no specific IRS guidance addressing abandonment losses in relation to cryptocurrency, adding to the uncertainty surrounding this approach.
If you’re unsure how to handle the tax implications of losses to your crypto holdings, please contact your ShindelRock tax professional.