When it comes to deducting or filing cryptocurrency losses, different situations apply to different tax rules within the U. The most common forms of cryptocurrency losses that we see here at CryptoTrader.
Tax are listed below:. Each scenario of cryptocurrency loss will fall under one of these three classifications: Casualty loss, theft loss, or investment capital loss. It is up to YOU how you want to handle and report your losses. The three categories are explained further below. A casualty loss is damage, destruction, or property loss resulting from one of these identifiable events:. Post , after the Tax Cuts and Jobs Act was passed into law, many forms of casualty losses that were previously deductible on form , no longer qualify for deductions.
As seen on the IRS site here , the only property that can be claimed as a deductible casualty has to be a federally declared disaster. In the case of cryptocurrency, anytime you negligently lose your cryptocurrency, it would be a casualty that is not deductible for tax purposes.
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and done with criminal intent. Similar to casualty losses above, post after the Tax Cuts and Jobs Act was passed, theft losses are no longer deductible on Form You can read more about the details of these rules in the IRS guidance here.
Reporting your lost crypto as an investment loss is the only approach that allows a tax exemption. As you will read below, it is unclear which crypto loss scenarios qualify for the investment loss status. We recommend consulting a tax professional with a unique situation. Our team is always happy to help refer you to someone. It is not explicitly clear whether events like ICO scams or exchange shutdowns like Mt. Gox can be treated as an investment loss. We surveyed many tax professionals familiar with cryptocurrency when writing this article, and they do not all agree on the proper treatment.
Investment losses are similar to a loss you would incur from buying a stock or another form of property and then selling it for less than you acquired it for. The same applies to selling bitcoin for less than you acquired it for. This type of capital loss is reportable on form where you must list your cost basis in the property, the fair market value at the time you disposed of it, and the net gain or loss. Larger losses will carry forward to future tax years. This is the basic process for reporting the majority of cryptocurrency transactions.
No black and white guidance from the IRS exists for these specific scenarios, so ultimately you must use your discretion on how to classify and file these events. We will walk through the different options below. In general, treat ICO as a securities offering and investing in it would be a capital investment. So a scam would be a capital loss on In such a case it is often recommended to obtain a report from FBI, local police or SEC or Financial crimes divisions that you have reported this investment as a fraud and scam.
The report is for your own IRS audit protection. We surveyed many tax professionals when writing this piece, and there were many differing opinions on the proper treatment of ICO scams. Ultimately, claiming an ICO scam as an investment loss will deduct the amount invested on form Exchange shutdowns like that of Cryptopia and Mt.
Some professionals argue that these would be an investment loss that can be reported on , and therefore you receive a tax break, while others claim an exchange shutdown would be a non-deductible personal casualty loss. In our survey for writing this article, most tax professionals saw an exchange shutdown as a casualty loss, and thus not a deductible event. The number of crypto exchanges is increasing monthly. Newbie traders are quick to register on a hyped exchange and after a while, their coins are gone.
There are light-fingered platforms as well, which charge a small amount like 0. And very often, the user cannot understand what is going on and why money is disappearing. Another problem with crypto exchanges — high commission rate.
According to online forums and crypto bloggers, Orangecoin. A lot of people confirm transactions with cryptocurrencies via a phone number. In the U. Many phones in the States are tied to a certain provider. Millions of dollars were stolen just like that. That is why it is safer to use services with multi-FA, or specific algorithm to protect your phone number from hijacking.
How to avoid it? Always double-check the address of the receiving wallet or use QR codes. The reality is, that everyone can get hacked. I have been using crypto for over 6 years. Recently, due to a chain of events and what was possibly a keylogger, has led to a loss of all of my funds. And trust me when I say, that I was sure that my security system was safe.
What is most important is to understand the importance of basic privacy and basic security rules. Some of which are described in this article. Before you log in and trust your money to any crypto exchange or wallet, it is better to read feedback on the forums or ask the experts if the service is safe. The more complicated verification and transaction confirmation service have — the better.
Preferably, verification via both email and phone number. Even if one will be cracked, the rest of your digital savings is safe. Hackers can crack your wallet, steal your password or private-key file from your device if you somehow gave access to your data to a public network you could have done it a long time ago while setting up a new laptop or searching for some info on the internet. Therefore, it is better to have all transactions done via a secured private network, at home.
A good piece of advice is also not to enter personal accounts with saved passwords using public Wi-Fi for instance, do not try to access any of your hot wallets. If possible, use crypto wallets that allow reliable encryption of your private keys and other sensitive data.
Or ask for special help to encrypt data on your hard disk. Installed from unknown resource app may contain computer virus which can steal sensitive data or destroy it. Disclaimer: TheTradable content is for informational purposes only. The website does not provide any financial advisory.
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