Crypto Losses and US Taxes: What Is Actually Deductible?

A falling portfolio does not automatically create a tax deduction. For investment crypto, a genuine sale or exchange can realize a capital loss that offsets capital gains, with a limited deduction against other income and carryover of the unused amount. A worthless token, lost key, scam, bankruptcy claim, business position, or futures contract can follow a different rule. The tax return must classify the event before it nets the number.

Short answer: market decline alone is not a capital loss

The IRS treats digital assets as property. When investment crypto is sold, exchanged, spent, or otherwise disposed of, gain or loss is generally the amount realized minus adjusted basis. A token-for-token exchange is a taxable transaction even when no dollars reach a bank account. A genuine sale below basis can therefore produce a capital loss.

An unrealized decline does not. If an investor bought ETH for $10,000 and still holds it when it is worth $6,000, the $4,000 decline is not reported on Form 8949. The taxpayer must identify a closed and completed event, the units disposed of, proceeds or fair market value, basis, fees, and date.

How capital losses net and carry forward

Short-term gains and losses are netted in their group; long-term gains and losses are netted in theirs. If one group is positive and the other negative, the results then offset each other. A remaining net capital loss can reduce other income by the lesser of $3,000 or the allowable net loss for the year. The limit is $1,500 for married filing separately.

An unused net capital loss carries to the next year and retains its short- or long-term character. It is used in the later year’s Schedule D computation and can continue to later years until absorbed. The carryover is not simply “original loss minus $3,000 each year”: the Schedule D capital-loss carryover worksheet also considers taxable income, and the current-year allowable deduction must be taken into account whether or not the taxpayer actually claimed it.

Example: an investor has $12,000 of short-term crypto losses and $5,000 of long-term stock gains, with no other capital items. The groups offset to a $7,000 net capital loss. Up to $3,000 can reduce other income on a joint or single return, subject to the return computation; the remaining amount can carry forward as short term.

Form 8949, Schedule D, and Form 1099-DA

Investment digital-asset disposals generally go on Form 8949 and then Schedule D. Current Form 8949 uses digital-asset boxes G, H, and I for short-term transactions and J, K, and L for long-term transactions, depending on whether a Form 1099-DA was received and whether basis was reported to the IRS.

• G/J: proceeds and basis reported to the IRS;
• H/K: transaction reported, but basis not reported;
• I/L: no Form 1099-DA or substitute statement for the disposal.

A broker statement does not replace the taxpayer’s reconciliation. Basis reporting for covered digital assets expands for 2026 broker transactions, but assets transferred from another wallet can remain noncovered or lack verified basis. Report all taxable disposals even without a form, and adjust broker information only with supportable records.

1. Reconcile opening units, acquisitions, disposals, transfers, and closing units.
2. Identify the disposed units under the applicable identification rules.
3. Separate short-term and long-term transactions.
4. Match each Form 1099-DA sale ID when available.
5. Explain adjustments rather than silently replacing broker values.
6. Carry Form 8949 totals into the correct Schedule D lines.

Use our Form 8949 and Schedule D guide and retain the evidence in the crypto records checklist.

Immediate repurchase is not a universal risk-free rule

Section 1091 applies the federal wash-sale rule to stock or securities. Ordinary spot cryptocurrency that is not stock or a security generally falls outside that wording, but tokenized stock and other digital assets that are stock or securities can be covered. The final digital-asset broker regulations expressly preserve wash-sale treatment for tokenized securities that meet Section 1091.

Even when Section 1091 does not apply to a spot token, the sale must be genuine and economically completed. Related-party loss rules, prearranged transactions, fees, spread, market movement, identification of units, and state treatment can change the outcome. The IRS has not issued a blanket statement that every same-day crypto sell-and-buy strategy is approved. Read the wash-sale and harvesting guide before relying on a repurchase.

Worthlessness and abandonment are not automatic capital losses

IRS Chief Counsel Advice 202302011 explains that cryptocurrency generally is not a “security” under the narrow worthless-security definition in Section 165(g). A mere decline, even a severe one, does not close the transaction. A truly worthless or abandoned investment can instead be a Section 165 loss, but for an individual it can be a miscellaneous itemized deduction rather than a capital loss.

The 2025 OBBBA made the Section 67(g) disallowance of miscellaneous itemized deductions subject to the two-percent floor permanent after 2017. As a result, creating an abandonment record does not automatically produce a usable 2026 deduction for a private investor. Do not fabricate a zero-value sale or send tokens to a burn address without first understanding the legal and economic effect.

Scams, theft, and lost keys

A theft or investment fraud has separate Section 165 requirements, including applicable law and reasonable prospects of recovery. Lost credentials or a mistaken transfer are not automatically a capital sale. The year of discovery, claims against exchanges or perpetrators, insurance, and pending recovery efforts matter.

Exchange bankruptcies

A bankruptcy can replace or evidence a crypto position with a creditor claim. Distributions of crypto, cash, stock, or other rights may themselves be realization events. A nonbusiness bad debt requires a bona fide debt with basis that becomes wholly worthless; partial worthlessness is insufficient. See the reviewed Celsius bankruptcy tax guide for the claim-ledger approach.

Futures, perpetuals, and business inventory

Some regulated contracts can fall under Section 1256, while offshore perpetuals or broker contracts may not. A trader’s business property and dealer inventory can also differ from investment capital assets. Keep spot, derivatives, funding, and business events separated until the contract and activity are classified.

Frequently asked questions

Official sources

• IRS Publication 550: capital losses, $3,000 limit, and carryovers
• IRS Instructions for Form 8949: digital-asset boxes and reporting
• IRS Chief Counsel Advice 202302011: declined, worthless, or abandoned cryptocurrency
• Treasury and IRS final digital-asset broker regulations: tokenized securities and wash sales
• IRS Notice 2026-10: permanent Section 67(g) disallowance under OBBBA

Substantively reviewed September 1, 2026. General information, not individualized federal, state, bankruptcy, fraud-loss, or derivatives advice.

Disclaimer: This article is for general informational purposes only and does not constitute tax advice. For individual tax advice, consult a licensed tax professional.