How Does the IRS Treat Losses from Virtual Currencies?

Background

The IRS treats virtual currency as property (IRS Notice 2014-21). That classification means gains and losses from sales, exchanges, or other dispositions of cryptocurrency follow capital gains rules rather than ordinary-currency rules. Reported gains and losses flow through Form 8949 to Schedule D of Form 1040 (IRS Form 8949 instructions; IRS Virtual Currencies page).

Reporting and forms

  • Report realized losses on Form 8949 (Sales and Other Dispositions of Capital Assets) and summarize on Schedule D (Form 1040). (See IRS Form 8949 instructions.)
  • If a third party provides a 1099 showing proceeds, reconcile those amounts on Form 8949 to avoid mismatches.

Helpful internal resources:

How losses offset taxes

  • Capital losses from crypto first offset capital gains (short‑term with short‑term, long‑term with long‑term). If losses exceed gains, you can use up to $3,000 ($1,500 if married filing separately) of net capital loss to reduce ordinary income in a tax year. Any remaining net capital loss carries forward to future years until used.
  • These limits follow the same rules that apply to other capital assets (stocks, bonds, real estate sales).

Special situations and common complications

  • Wash sale rules: Section 1091’s wash sale rule applies to “stocks or securities.” As of 2025, the IRS has not issued definitive guidance declaring that wash sale rules apply to cryptocurrencies, so treatment is unsettled. Many practitioners track tax lots and avoid repurchasing the same asset within short windows, but expect this area to evolve.
  • Theft, loss, and disaster: The deductibility of cryptocurrency theft or loss depends on facts and whether losses are business-related. Personal theft/casualty rules narrowed after tax law changes; consult a professional for crypto-theft treatment. (No broad, definitive IRS guidance as of 2025.)
  • Exchanges between cryptos: Exchanging one token for another is a taxable disposition of the token you give up; compute gain or loss using fair market values at the time of the swap.

Example

You bought 1 BTC for $15,000 and later sold it for $9,000. You realized a capital loss of $6,000. If you had $4,000 of capital gains from stocks that year, you could use $4,000 of the crypto loss to offset those gains and then apply up to $2,000 of the remaining loss against ordinary income that year (subject to the $3,000 annual limit and other rules). Any leftover loss would carry forward.

Recordkeeping — vital in practice

In my practice I see returns affected by poor records. Keep: dates acquired and sold, cost basis (including fees), proceeds, and how you determined fair market value for each trade. Use exchange statements and export transaction histories; reconciliation software can simplify tax lot selection and Form 8949 reporting.

Table — common crypto dispositions and tax result

Transaction type Tax result
Sell crypto for fiat (USD) Taxable sale — gain or loss realized
Buy goods/services with crypto Taxable disposition — treat as sale at FMV
Exchange crypto A for crypto B Taxable disposition of A; record gain/loss
Airdrop or staking reward Usually taxable as ordinary income when received; later sale creates capital gain/loss

Common mistakes

  • Not reporting small or frequent disposals (each is taxable when realized).
  • Using broker reports without reconciling basis adjustments or fees.
  • Assuming wash sale rules protect against recognition of losses (treatment is unsettled for crypto).

Quick FAQ

  • Are virtual currency losses deductible? Yes — they are capital losses reported on Form 8949 and Schedule D and may offset capital gains and up to $3,000 of ordinary income per year, with carryovers allowed.
  • Which forms do I file? Report each disposition on Form 8949 and summarize on Schedule D (Form 1040). See IRS Form 8949 instructions and the IRS Virtual Currencies page for details.

Practical tips

  1. Reconcile exchange 1099s and wallet records every year.
  2. Choose and document a cost-basis method (specific identification, FIFO, etc.) and be consistent — specific identification requires good records.
  3. If you find unreported past transactions, consider amending returns; see guidance on when to amend for crypto errors on FinHelp.

Professional disclaimer

This content is educational and does not replace personalized tax advice. Tax treatment can change and depends on facts and circumstances. Consult a qualified tax professional or the IRS for guidance specific to your situation.

Authoritative sources

(Prepared with practitioner experience and current IRS guidance through 2025.)