Can I Deduct Crypto Losses? Limits, Wash Sale Rule, and Filing

Yes, you can deduct crypto losses on your federal tax return, but only after you sell, trade, or spend the coins for less than you paid. The IRS treats cryptocurrency as property, so the capital loss rules that apply to stocks apply to your digital holdings.¹ Losses offset your capital gains dollar for dollar with no cap, and if losses still exceed gains, you can deduct up to $3,000 of the excess against ordinary income like wages or interest.²

A Drop in Value Isn’t Enough

Watching your portfolio fall has no tax effect. You need a closed transaction. Three actions turn a paper loss into a deductible one:

Selling crypto for U.S. dollars.
Trading one cryptocurrency for another, such as swapping Bitcoin for Ethereum.
Spending crypto on goods or services, which the IRS treats as selling the property and using the proceeds to pay.³

In each case, compare the fair market value at the moment of the transaction to your cost basis. If the value is lower, you have a capital loss. Cost basis is what you paid, including any transaction fees charged by the exchange.⁴

How Much You Can Actually Deduct

Your losses go to work in a specific order. First, they wipe out capital gains from any source, whether from crypto, stocks, real estate, or another investment. That offset has no dollar limit. Only after gains are exhausted does the $3,000 cap come into play, and it applies only to what’s left over after netting against gains. If you’re married and file a separate return, the annual cap is $1,500.²

Losses you can’t use this year don’t expire. Under Section 1212 of the tax code, the unused portion carries forward into the next year, and the year after that, until it’s fully absorbed.⁵ Each year, the carryover first offsets any new capital gains, then up to $3,000 goes against ordinary income, and any remainder rolls forward again. Short-term losses stay short-term as they carry; long-term stays long-term. The IRS doesn’t track your carryover for you, so keep a running record.

Short-Term and Long-Term Losses Behave Differently

Crypto held for one year or less produces a short-term capital loss. Held for more than one year, it produces a long-term loss. Short-term losses first offset short-term gains, which are taxed at your ordinary income rate. Long-term losses first offset long-term gains, which are taxed at 0%, 15%, or 20% depending on your income.⁶ Anything left over in one category then crosses to offset the other. The netting happens automatically on Schedule D.

The Wash Sale Rule Doesn’t Apply to Crypto

Stock investors who sell at a loss can’t deduct it if they buy a substantially identical replacement within 30 days before or after the sale.⁷ That statute reaches only “shares of stock or securities.” Because crypto is classified as property rather than a security, the wash sale rule does not currently apply to digital assets. You can sell Bitcoin at a loss, immediately repurchase the same amount, and still claim the full deduction while keeping your portfolio position intact.

The rule could change. A 2025 report from the President’s Working Group on Digital Asset Markets recommended extending wash sale rules to digital assets, and prior legislative proposals have included similar language. As of the 2026 tax year, none has been enacted. If you’re planning a large harvest late in the year, check the status before you sell.

Choosing Which Coins You Sold

If you bought the same coin at different prices over time, the method you use to identify which units you sold changes the size of your loss. The IRS default is first in, first out: the oldest units are treated as sold first.³ That works against you when your earliest purchases were the cheapest, because selling those units first produces a smaller loss or even a gain.

The alternative is specific identification. Say you bought Bitcoin at $60,000 in one batch and $25,000 in another. During a downturn, selling from the $60,000 batch produces a much larger deductible loss. To use specific identification, you need records showing the date and time of each acquisition, the number of units, and the fair market value when purchased.⁶

Starting in 2025, the IRS requires taxpayers to track basis on a wallet-by-wallet and account-by-account basis rather than pooling everything together. Revenue Procedure 2024-28 provided a safe harbor for the transition, and Notice 2025-07 offers temporary relief for taxpayers whose brokers haven’t yet built tools for specific lot selection.⁸

Frozen Accounts, Bankruptcies, and Worthless Coins

Crypto stuck in a frozen exchange account or tied up in bankruptcy is not deductible yet. The IRS requires a closed and completed transaction before a loss can be claimed.⁹ Losing access alone doesn’t qualify.

Once bankruptcy concludes, the outcome depends on what you receive. A partial settlement in cash or reduced crypto is treated as a sale: use the settlement value as your proceeds and your original purchase price as your cost basis, and report the loss on Form 8949. If you receive nothing, the investment may qualify as worthless property under Section 165 of the tax code, but only if there’s a clear event establishing worthlessness in the year you claim it.

The IRS Chief Counsel has clarified that the special worthless securities rule under Section 165(g) does not apply to cryptocurrency, because crypto isn’t among the securities listed in that provision. A worthless crypto claim falls under the general loss rule of Section 165(a). For the 2026 tax year, that deduction is available as a miscellaneous itemized deduction, a category suspended from 2018 through 2025 under the Tax Cuts and Jobs Act and now restored.¹⁰ You have to itemize rather than take the standard deduction, and the deduction is subject to a 2% adjusted gross income floor.

A coin trading at fractions of a penny is generally not considered worthless. As long as it has some liquidating value and can be traded, the cleaner path is to sell it, even for a negligible amount, and claim the loss as an ordinary capital loss.

How to File the Loss

Every individual sale, trade, or purchase goes on Form 8949.¹¹ For each transaction you’ll list:

A description of the digital asset, such as “2.5 BTC.”
The date acquired.
The date sold, traded, or spent.
Proceeds, in U.S. dollars, at the time of the transaction.
Cost basis, including transaction fees.

Form 8949 splits short-term (Part I) and long-term (Part II) transactions. The totals flow to Schedule D of Form 1040, where gains and losses net out to a final number.¹² Most tax software handles the transfer automatically. If you have hundreds of transactions across exchanges, software that imports exchange data and applies your chosen cost basis method is worth the cost.

Every Form 1040 also asks a yes-or-no digital asset question. If you sold, exchanged, or otherwise disposed of a digital asset during the year, the answer is yes.¹³ Answering no when you had reportable transactions creates a discrepancy the IRS can flag, especially with broker information returns now flowing in.

Why Your Records Still Matter More Than 1099-DA

Starting with the 2025 tax year, crypto brokers began issuing Form 1099-DA reporting the gross proceeds from your digital asset sales to you and to the IRS. For 2025, the form covers only gross proceeds, not cost basis. The IRS knows what you sold for, but you still have to prove what you paid.⁶

Beginning with the 2026 tax year, brokers must also report cost basis, but only for covered securities: digital assets acquired on or after January 1, 2026, and held continuously in the same broker account until sale. Anything bought before that date or transferred in from another wallet or exchange is noncovered, and brokers don’t report its basis. When you move crypto between brokers, the basis chain breaks, because no mechanism exists for brokers to hand that information off to each other. Your own transaction logs fill the gap, and they’re what will let you claim the loss you’re entitled to.

1
Internal Revenue Service. Notice 2014-21
2
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
3
Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions
4
eCFR. 26 CFR 1.1012-1 – Basis of Property
5
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
6
Internal Revenue Service. Digital Assets
7
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
8
Internal Revenue Service. Notice 2025-07 – Temporary Relief Under Section 1.1012-1(j)(3)(ii)
9
Taxpayer Advocate Service. TAS Tax Tip: When Can You Deduct Digital Asset Investment Losses on Your Individual Tax Return?
10
Internal Revenue Service. Notice 2018-61
11
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
12
Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
13
Internal Revenue Service. Determine How to Answer the Digital Asset Question