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Investing in cryptocurrency isn’t for the faint of heart. As volatile as the stock market can be, the crypto market can be even more volatile. And last year, it certainly saw its share of swings. So if you lost money on crypto in 2022, you may be in good company.
Of course, it’s never a great thing to lose money on an investment, since that’s the opposite of what you’re trying to achieve by putting your cash to work. But if you took an actual loss on crypto in 2022, you may be able to use that to your benefit when you file your taxes this year.
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A tough year for investors on a whole
It’s fair to say that 2022 was a rocky one for investors by and large. Not only did stock values drop, but crypto absolutely plunged. In fact, it’s estimated that Bitcoin alone lost over 60% of its value in 2022, so if that’s an asset you held, it may have impacted you.
Now one thing you should know is that any time you take a loss on an investment, it can serve as a tax break. So if you lost, say, $5,000 in crypto in 2022, you can use that $5,000 loss to offset capital gains. And if you don’t have a full $5,000 in capital gains, you can use some of that loss to offset your ordinary income.
To be clear, though, you can only claim a capital loss on your taxes if you actually went and sold off assets at a price that’s lower than what you paid for them. So, let’s say you bought stocks in your brokerage account for $4,000 that you sold for $3,000. That means you can claim a $1,000 loss. But if the value of those stocks dropped to $3,000 but you haven’t sold them, you’re not looking at an actual loss — and so there’s no tax break to be had.
The same applies to crypto. Maybe your portfolio is down significantly due to the hit the crypto market took in 2022. But if you didn’t sell your digital currencies at a lower price than what you paid for them, you won’t be eligible to claim a loss.
To put it another way, the IRS only lets you claim actual losses on your taxes, not hypothetical ones. But if you didn’t sell your assets when they were down, your portfolio could still recover. So you can’t claim a loss in that scenario.
Know the rules
Writing off capital losses could serve as a major tax break. But it’s important to do so with accuracy. That’s why it’s a good idea to engage the services of a tax professional when you’re dealing with capital losses. They can help you navigate the rules and make sure you’re taking advantage of the tax breaks that are available to you. They can also help ensure that you don’t accidentally claim a tax break you aren’t entitled to.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
