Can You Deduct Crypto Losses? + FAQs

The answer is yes – crypto losses can be tax-deductible under U.S. law, but only under specific conditions.

In 2022, cryptocurrencies wiped out nearly $2 trillion in market value. Many investors ended up in the red

If you sold or traded crypto for less than you paid, you’ve realized a capital loss. Both individual taxpayers and businesses can use crypto losses to offset taxable gains and potentially reduce their tax bills. However, strict rules limit how and when you can claim these write-offs. Below, we break down exactly when you can deduct crypto losses, how it works at the federal level, and where state laws might treat you differently.

✅ Quick Answer: Yes, Crypto Losses Are Deductible (Under Certain Conditions)

Yes, you can deduct crypto losses on your U.S. taxes – but only if you meet key conditions. Here’s the gist:

You must realize the loss: Crypto losses only count when you sell, trade, or otherwise dispose of the coins. An unrealized loss (a drop in value of coins you still hold) gets you no tax break.

Capital loss rules apply: The IRS treats cryptocurrency as property. When you lose money on crypto investments, it’s a capital loss. You can use crypto losses to offset your capital gains (from crypto or other assets like stocks). If your losses exceed gains, up to $3,000 of the excess can reduce your ordinary income (wages, business income, etc.) for the year ($1,500 if married filing separately).

Carryovers for future tax savings: Any losses beyond that $3,000 yearly limit aren’t wasted – you can carry forward unlimited leftover crypto losses to future tax years. They’ll keep offsetting gains (and up to $3K of income each year) until used up.

No wash sale rule (yet 🙂): Unlike stocks, crypto isn’t currently subject to “wash sale” rules. That means you could sell crypto at a loss for the tax benefit and buy it back right away without waiting 30 days. (Note: lawmakers have proposed extending wash sale rules to crypto, but as of 2025 it’s not law.)

Personal vs. business: Whether you’re an individual investor or a business, crypto losses typically fall under these capital loss rules. Individuals get the $3K limit and indefinite carryforward. C-corporations can also deduct capital losses but only against capital gains (no $3K offset against ordinary income) and with different carryback/forward rules (more on that below).

In short, crypto losses can absolutely turn into tax savings, but only if you play by IRS rules. Next, we’ll explore the fine print and special cases to make sure you don’t leave any money on the table.

👍 Pros and Cons of Claiming Crypto Losses

Even if you can deduct crypto losses, should you? Here are some key advantages and disadvantages to consider:

Pros of Writing Off Crypto Losses	Cons to Watch Out For
Tax savings: Lowers your tax bill by offsetting capital gains and up to $3K of other income.	Annual limit: Individuals can only deduct $3,000 of net losses against ordinary income per year ($1,500 if married filing separately). Big losses may take years to fully use.
Offsets all capital gains: Unlimited crypto losses can fully cancel out other capital gains (from stocks, real estate, etc.) in the same year.	No relief without a sale: You get zero deduction until you sell or dispose of the asset. Holding onto a losing coin won’t help at tax time.
Carryforward potential: Unused losses roll forward indefinitely, creating a “bank” of deductions for future years’ profits.	Records and reporting: You need thorough records of every transaction. The IRS requires you to report crypto sales (even at a loss) on Form 8949/Schedule D, which can be time-consuming.
No wash sale rule (for now): Crypto investors can harvest losses and buy back in immediately, unlike stock traders who must wait 30+ days.	State tax differences: Some states don’t allow crypto (or any capital) losses to offset income like the feds do. Your state might limit or delay your tax benefit (details below).

⚠️ Avoid These Costly Mistakes When Writing Off Crypto Losses

Even savvy crypto traders slip up on their taxes. Make sure you avoid these common mistakes when claiming crypto losses:

Waiting too long to sell: If your coin’s value plunged, don’t wait indefinitely hoping for a rebound. You only lock in a tax deduction when you sell or dispose of the asset. Without a sale, your loss isn’t deductible.

Assuming all losses are deductible: Not every crypto “loss” is recognized by the IRS. For example, if you lost access to a wallet or your coins dropped to near-zero but you haven’t sold, you generally can’t claim a loss (unless you take specific steps to abandon it).

Misusing the $3,000 limit: Some filers mistakenly try to deduct their entire loss in one year. Remember, if your net losses exceed your gains by more than $3,000, you can only use $3,000 this year – the rest carries over. Don’t claim more than allowed, or you’ll hear from the IRS.

Ignoring short-term vs. long-term: Crypto held under a year is a short-term loss; over a year is long-term. While both are deductible, they get reported separately. Don’t mix them up on your tax forms. (Short-term losses first offset short-term gains, and long-term losses offset long-term gains, before any net loss is applied to other income.)

Forgetting state tax rules: Your federal return might allow the loss, but your state could play by different rules. For instance, states like Pennsylvania and New Jersey don’t allow you to carry forward capital losses or deduct them against other income. Always check your state’s stance – or you might underpay state tax by mistake.

Poor record-keeping: The IRS expects documentation. If audited, you’ll need to show how you calculated your crypto losses (transaction dates, amounts, cost basis, sale price, etc.). Keep exchange statements, transaction logs, and any Form 1099-B or 1099-MISC you received. 📁

📊 Real-Life Examples: How to Write Off Your Crypto Losses

Sometimes it’s easiest to see the rules in action. Below are three scenarios showing how crypto loss deductions play out for typical taxpayers:

Example 1: Offsetting Stock Gains with a Crypto Loss

Jenna had a great year trading stocks – she realized a $10,000 capital gain from selling some tech shares. Unfortunately, she also sold some Bitcoin for a $7,000 loss. Come tax time, Jenna can use that $7,000 crypto loss to offset $7,000 of her stock gain. This means she’ll only pay capital gains tax on $3,000 of net gain ($10K minus $7K). By deducting her crypto losses, Jenna significantly cuts her tax bill for the year.

Example 2: Big Crypto Loss, No Gains This Year – Now What?

Marco invested in various coins and racked up a $15,000 loss after selling off a failing altcoin project. He had no other capital gains in 2025. How much can Marco deduct? He can apply $3,000 of that loss against his regular income (say, his salary) this year. The remaining $12,000 loss doesn’t disappear – Marco carries it forward. In 2026, that $12K will be available to offset future gains, or again up to $3K of income, and so on until it’s used up. Essentially, Marco gets to spread the tax benefit of his big loss over multiple years.

Example 3: Crypto Stolen in a Hack – Is It Deductible?

Sara was hacked and lost $5,000 worth of Ethereum that she held in a personal wallet. Unfortunately for Sara, personal theft losses (including crypto hacks) are not deductible on federal taxes from 2018 through 2025, due to tax law changes. She can’t claim a theft loss deduction for this incident. Her only hope for a tax write-off is if she can treat the coins as worthless or totally lost value. If she’s able to show the asset is completely worthless (or if she abandons her claim to it in a demonstrable way), she might claim a capital loss. But without clear guidance on such situations, most individuals like Sara won’t get tax relief for stolen or lost crypto under current law.

Common Crypto Loss Scenarios for Individuals:

Individual Investor Scenario	Tax Deduction Outcome
Sold crypto at a loss (and you have capital gains too)	Loss can fully offset your capital gains from any assets (crypto, stocks, etc.) in the same year, reducing those gains dollar-for-dollar. If losses exceed gains, the leftover loss (up to $3,000) also cuts your other income this year. Any remaining loss carries forward.
Sold crypto at a loss (and you have no capital gains)	You can deduct up to $3,000 of the loss against your other income (like salary) this year. Any loss above $3K is carried forward to use in future years (again $3K/year or against future gains).
Crypto became worthless (no market value, no buyer)	You can treat it as if you sold the asset for $0. This means you claim a capital loss equal to your basis. It’s deductible like any other capital loss (offset gains, then up to $3K/year, etc.), but be prepared to show evidence that the coin truly became worthless in the tax year.
Crypto was stolen or hacked (personal account)	Unfortunately, personal casualty/theft losses are not deductible in 2025 (unless in a federally declared disaster). So a hack or scam loss from a personal wallet usually cannot be written off. (No capital loss either, since you didn’t sell – the asset was taken.)

🏢 Business Crypto Losses: Special Rules for Companies

What about businesses that invest or deal in crypto? The tax principles are similar, but there are a few crucial differences for companies:

Capital losses for corporations: A regular C-corporation can deduct crypto capital losses only against its capital gains (there’s no $3,000 offset against ordinary income for companies). If a corporation’s crypto losses exceed its gains, it can’t use the extra loss to lower its operating income. Instead, corporate capital losses get carried to other years: they can be carried back 3 years and forward 5 years to offset capital gains in those years.

Pass-through entities: For S-corporations, partnerships, or LLCs taxed as partnerships, crypto losses flow through to the owners’ personal tax returns. Those losses then follow the individual rules (including the $3K annual limit at the individual level). In other words, a small business owner with pass-through losses from crypto faces the same limits as if they incurred the loss personally.

Crypto treated as inventory: If your business is a dealer or trader in cryptocurrency (for instance, a crypto brokerage or a mining business that sells mined coins as inventory), you might treat crypto holdings as inventory rather than capital assets. Losses in value on inventory can potentially be deducted as ordinary business expenses (through cost of goods sold or write-downs), not subject to the $3K cap. This can get complex – most businesses stick with capital asset treatment unless they truly have inventory for sale.

Theft or casualty losses (business property): If a business’s crypto assets are stolen, hacked, or lost due to a breach, the loss could be deductible as a business expense or casualty loss. Business theft losses are not subject to the personal casualty loss limitations – they can often be deducted in full against business income. Documentation (police reports, etc.) would be required to substantiate such a loss.

Key takeaway for businesses: Crypto losses generally don’t offer any magical tax shield beyond normal capital loss treatment. Corporations get no special break – in fact, they have more restrictive rules (no $3K offset against ordinary income). One silver lining is that if crypto is integral to your business inventory, losses might be treated as ordinary losses. But that typically applies to specialized cases.

For clarity, here’s a quick summary of business crypto loss scenarios:

Business Scenario	Tax Treatment
Corporation sells crypto at a loss (no other gains)	Capital loss can’t offset regular business income. The loss can only be used to offset capital gains. Unused loss is carried back 3 years or forward 5 years to apply against past/future capital gains.
Pass-through entity (e.g. LLC, S-corp) incurs crypto loss	Loss flows through to owners’ individual returns. Owners use the loss just like a personal capital loss (offset their own gains + up to $3K of other income, remainder carryforward).
Crypto held as inventory by a business	Treated as business inventory, not a capital asset. Losses in value may reduce business income (via write-downs or cost of goods sold) – no $3K limit, but must follow inventory accounting rules.
Crypto stolen/hacked from business accounts	Treated as a business theft/casualty loss. Deductible in full against business income in the year of loss (once reasonably certain no recovery), since it’s not subject to the personal casualty loss restrictions.

👩‍⚖️ Legal Proof: Tax Code and Cases Behind Crypto Loss Deductions

Crypto taxes might feel like the Wild West, but the IRS and courts have laid down clear rules:

IRS Notice 2014-21: The IRS officially declared that virtual currency (like Bitcoin) is treated as property for tax purposes. This established that crypto sales producing gains or losses are taxed under capital asset rules – just like stocks or real estate.

Tax Code §§ 1211 & 1212 (Capital Loss Limits): These laws cap how much capital loss you can deduct and allow carryovers. Section 1211 is why individuals face the $3,000 limit against ordinary income (and why corporations can’t deduct capital losses against ordinary income at all). Section 1212 lets you carry forward unused losses indefinitely (or for corporations, carry back 3, forward 5).

No Wash Sale Rule (Yet): Current law (as of 2025) does not classify crypto as a security for the wash sale rule (Section 1091). That means the 30-day repurchase restriction doesn’t apply. Congress has considered extending the wash sale rule to crypto to close this “loophole,” but no change is in effect yet.

IRS Chief Counsel Advice 2023: In a 2023 memo, the IRS confirmed that a mere drop in crypto’s value isn’t deductible. You can’t claim a loss just because your coin’s price tanked – you have to sell or completely abandon the asset. The IRS also noted that claiming a “theft loss” for a failed exchange or scam is generally not allowed as a personal deduction under the current rules (except for Ponzi scheme victims under a special safe harbor).

Court cases: While few court cases have directly tested crypto loss deductions, tax courts uphold the same principles that apply to stocks and other assets. In one case, a taxpayer argued a cryptocurrency became worthless and tried to deduct it; the IRS insisted on proof of worthlessness and an identifiable event. The courts have sided with the IRS that you need concrete events (sale, exchange, or demonstrable abandonment) to realize a loss. In plain terms: no sale, no deduction.

IRS enforcement: The IRS is actively enforcing crypto tax compliance. They’ve pursued taxpayers who didn’t report crypto gains, and similarly, if you overstep on losses (e.g. claiming excessive losses or without proper transactions), expect scrutiny. Always follow the letter of the law when deducting losses – and keep records to back it up.

All of the above means you can confidently deduct legitimate crypto losses, backed by U.S. tax law – but you must do it correctly. The legal framework treats crypto losses largely the same as other capital losses, with no extra leniency. As long as you document your transactions and abide by the limits, the IRS allows these deductions. On the flip side, creative attempts to write off losses without actual dispositions (or personal losses like hacks under suspended provisions) won’t fly.

🗺️ State-by-State Differences: Why Your Location Matters

After handling your federal taxes, you also need to consider state income tax rules for crypto losses. States often piggyback on federal tax law, but not always. Here are some major state-level differences:

States with no income tax: If you live in a state like Florida, Texas, or Nevada, good news – there’s no state income tax at all. That means no state capital gains or losses to worry about. Your crypto losses only matter for your federal return.

States that follow federal rules: Many states (like California, New York, and most others) largely adopt the federal treatment of capital losses. They’ll allow you to deduct up to $3,000 of net capital loss against state income and carry forward the rest, just as on the federal side. (Some states might require a minor adjustment form, but the core rules are similar.)

States with no capital loss offset for income: A few states are stricter. For example, Pennsylvania doesn’t allow you to deduct capital losses against other income at all, and it doesn’t allow carrying losses forward. Essentially, in PA your crypto losses can only offset capital gains in the same year – any excess is lost for state purposes. New Jersey is similar: you can use crypto losses against other gains in that year, but you can’t carry forward unused losses to future years on your NJ return.

Different state tax rates: Also keep in mind that state tax rates on capital gains vary. Some states tax all income (including capital gains) at a flat rate or ordinary rates, so a capital loss might save you tax at your full state income tax rate (which could be as high as ~13% in California, for example). Other states have lower rates on capital gains or exclusions – which could slightly affect the value of your loss deduction. Always check your state’s tax guidelines or consult a CPA for specifics.

Bottom line: Don’t assume your state treats crypto losses the same way as the IRS. Most do, but some outliers can significantly change your tax outcome. Double-check whether you can take the full loss on your state return, and if carryforwards are allowed. You don’t want a surprise tax bill from your state because you applied a deduction that isn’t recognized there.

Here’s a quick look at how different states handle crypto loss deductions:

State Tax Scenario	Crypto Loss Treatment at State Level
No state income tax (e.g. FL, TX, NV)	No state tax on capital gains, so crypto losses provide no state tax benefit (since there’s nothing to offset). You only benefit on your federal return.
State follows federal rules (e.g. CA, NY, IL)	Generally allows the same capital loss deduction as federal: offset gains fully, then up to $3K of loss against other income, with indefinite carryforward of excess losses. (Some states require a state Schedule D, but the rules mirror the IRS.)
State disallows carryovers (e.g. PA, NJ)	Capital losses can only offset capital gains in the current year. You cannot deduct net losses against wages or carry them to future years on the state return. Unused losses essentially expire for state purposes.
Different capital gains tax regime (e.g. AZ, MT)	A few states have special rates or exclusions for capital gains. This doesn’t usually affect deducting losses, but it can affect how much tax savings a loss generates. (In states with lower tax on gains, a loss is slightly less valuable.)

🔄 Crypto vs. Stocks vs. Other Assets: How Loss Deductions Stack Up

Is writing off a crypto loss any different from other investments? Here’s how crypto compares to a few common asset classes when it comes to tax-loss rules:

Cryptocurrency vs. Stocks: Both are capital assets, so losses are generally treated the same: they offset gains, then up to $3K of ordinary income, with carryforward of excess. Key difference: Stocks are subject to the wash sale rule. If you sell a stock at a loss, you can’t buy the same stock (or a “substantially identical” one) within 30 days before or after, or else the IRS disallows your loss deduction. Crypto, on the other hand, currently avoids the wash sale rule (since it’s not classified as a security). This gives crypto investors more flexibility to harvest losses without timing restrictions – a notable tax advantage. (However, if laws change, crypto could lose this loophole.)

Crypto vs. Real Estate: Real estate used for investment (like rental property) generates capital losses when sold at a loss, similar to crypto. Those losses can offset other capital gains. But one big catch: you cannot deduct a loss on the sale of personal-use real estate (e.g. your home) under tax law. Crypto, being an investment or income-producing property, doesn’t have a “personal use” limitation – if you bought crypto, it’s presumed to be for investment, so losses are deductible. Real estate investors also have no wash sale rule, but they do have the option of like-kind exchanges to defer gains (an option crypto doesn’t have, since 2018).

Crypto vs. Personal Property: Selling your car or personal jewelry at a loss? Sorry, those are personal-use properties, and losses aren’t deductible. Crypto is more like an investment asset, so losses are deductible. In other words, crypto gets favorable tax treatment compared to most personal items, because it’s not considered a personal consumer good.

Crypto vs. Commodities & FX: If you trade gold, oil futures, or foreign currencies, you also realize capital gains and losses. Crypto losses work similarly. One nuance: some commodity/futures trades are treated under special tax sections (like Section 1256 contracts with 60/40 capital gain treatment), and foreign exchange losses have their own rules (personal currency losses under $200 might be disregarded, etc.). But if you’re simply investing, the ability to deduct losses with crypto is on par with these assets. In fact, crypto’s lack of a wash sale rule can make it easier to harvest losses compared to certain regulated securities or funds.

Crypto vs. Gambling losses: Gambling is very different – you can only deduct gambling losses up to the amount of gambling winnings, and only if you itemize deductions. Crypto losses are far more useful than gambling losses because you can take them even without any gains (up to $3K/year against other income, plus carryforward). There’s no requirement to itemize or have “crypto winnings.”

Overall, the tax code doesn’t single out crypto losses for any harsher treatment than other investments. In fact, crypto’s classification as property gives it similar or better loss deduction opportunities compared to stocks (no wash sale to worry about) and far better than personal assets or gambling losses. Just remember that at the end of the day, a crypto loss is a capital loss – and the classic capital loss rules will always apply.

❓ Crypto Tax FAQ: Quick Answers to Hot Questions

Q: Can I deduct crypto losses if I haven’t sold any coins?
A: No. You only get a deduction when you realize a loss through a sale, trade, or disposal. A drop in value alone doesn’t count until you actually sell or abandon the asset.

Q: Does the wash sale rule apply to crypto?
A: Not for now. As of 2025, crypto isn’t subject to wash sale rules – you can sell at a loss and buy back immediately. (Future laws could change this, but currently it’s a crypto perk.)

Q: Do I need to file a tax return if I only had crypto losses?
A: Yes – to claim and carry over losses you should file a return, even with no income. Otherwise, the loss won’t be recorded for future use.

Q: How do I report a crypto loss on my taxes?
A: On IRS Form 8949 and Schedule D. List each crypto sale or trade with its cost basis and proceeds. The difference (cost minus proceeds) is your loss to include on those forms.

Q: My crypto exchange went bankrupt. Can I claim a loss?
A: Not yet. If your coins are stuck in a bankrupt exchange, wait to see what you recover. You can only claim the loss once it’s clear you won’t get your crypto back.

Q: I lost crypto in a hack/scam – can I write it off?
A: Unfortunately, no (not for personal holdings). Personal theft or scam losses aren’t deductible on taxes right now (unless it’s a federally declared disaster). There’s generally no tax write-off for a hacked account.

Q: Can crypto losses offset my salary or other ordinary income?
A: Yes, but only up to $3,000 per year. After using losses against any capital gains, you can apply up to $3K of net crypto losses to reduce your other income (wages, etc.) annually.

Q: How long can I carry forward crypto losses?
A: Indefinitely. Unused crypto losses carry forward until you use them up – they never expire. You can apply them to future gains (and $3K of income per year) as long as needed.

📖 Crypto Tax Glossary: Key Terms & Entities Explained

Capital Asset: Almost everything you own for investment or personal purposes is a capital asset (crypto, stocks, property). Selling a capital asset can result in capital gains or losses.

Capital Gain / Loss: The profit or loss when you sell a capital asset. If you sell crypto for more than you paid, that’s a capital gain (taxable). If you sell for less, that’s a capital loss (deductible, with limits).

Short-Term vs. Long-Term: A short-term capital gain/loss comes from selling an asset you held 1 year or less. Long-term is for assets held more than 1 year. Long-term gains get lower tax rates, but for losses, both short and long are deductible similarly (short-term losses offset short-term gains first, etc.).

Wash Sale: A rule that disallows a capital loss if you buy the same or similar asset within 30 days of selling it at a loss. This applies to stocks and securities. Crypto is not a security for this rule as of 2025, so wash sales don’t apply (yet).

Basis (Cost Basis): The original value of an asset for tax purposes, usually what you paid for it (including fees). Your capital loss is essentially basis minus sale price (if positive). Keeping track of your basis in each crypto purchase is vital for accurate loss calculations.

Form 8949: An IRS form where you detail each capital asset transaction (crypto sale/trade, stock sale, etc.). You list the date you bought and sold, the purchase basis, sale proceeds, and gain or loss for each transaction. Crypto losses have to be reported here.

Schedule D: A summary tax form for Capital Gains and Losses. After listing individual trades on Form 8949, totals go onto Schedule D. This is where the $3,000 limit is applied and where carryover losses from prior years are entered.

Section 1211: Part of the tax code that limits capital loss deductions. For individuals, it says you can deduct capital losses only up to the amount of capital gains plus $3,000 ($1,500 if married filing separately). For corporations, it disallows using capital losses against ordinary income completely.

Section 1212: Part of the code that allows unused capital losses to be carried over. Individuals can carry forward excess losses indefinitely. Corporations can carry losses back 3 years and forward 5 years.

Section 165: The section governing losses. It covers capital losses (165(f)), casualty and theft losses (165(c) and 165(h)), and more. For example, 165(e) allows theft losses (but personal theft losses are suspended 2018-2025 unless in a disaster), and 165(g) covers worthless securities (treating a worthless stock as sold for $0).

Casualty/Theft Loss: A deduction for losses from sudden events (like natural disasters, theft, fires). Personal casualty/theft losses are heavily restricted from 2018-2025 – only allowed for federally declared disasters. So, a hacked crypto account or scam loss typically doesn’t qualify for a personal deduction under these rules.

Carryforward / Carryback: Tax mechanisms to use losses in a different tax year. Carryforward means applying unused losses to future years’ returns; carryback (available to C-corps for capital losses) means applying them to prior years’ returns (potentially getting a refund).

Like-Kind Exchange: A tax provision that allows swapping certain assets without immediate tax (defer gains). Since 2018, this only applies to real estate. You cannot do like-kind exchanges with crypto to defer gains or losses – every crypto trade is a taxable event.

Ponzi Scheme Loss (Safe Harbor): A special IRS policy for victims of investment fraud/Ponzi schemes (e.g. Bernie Madoff). It lets them deduct theft losses as an itemized deduction (often treating 95% of the loss as theft in the year it’s discovered). This is one of the rare ways a personal investment loss can be deducted outside the $3K capital loss limit. (Regular crypto scams unfortunately don’t get this favorable treatment.)

IRS (Internal Revenue Service): The U.S. tax authority. They issue guidance like Notices and Revenue Rulings on crypto, and they enforce tax laws (audits, letters) to ensure crypto income and losses are reported correctly.

CPA/Tax Professional: A certified public accountant or tax advisor who can help navigate complex crypto tax issues. Given the nuances of crypto loss deductions (and varying state rules), consulting a professional is wise if your situation is complex.