Can You Claim Crypto Losses on Your Taxes? Limits, Forms, and Wash Sales

You can claim crypto losses on your taxes once you actually sell, swap, or spend the asset at a loss. The IRS treats digital assets as property, so a crypto loss follows the same capital-loss rules as a loss on stocks or real estate.¹ Losses first cancel out capital gains dollar for dollar. Anything left over can knock up to $3,000 off your ordinary income each year, and whatever still remains carries forward into future tax years indefinitely.²

When a Crypto Loss Actually Counts

Watching a token drop 80% in your wallet does nothing for your tax bill. The IRS only recognizes a loss after a completed transaction, and there are three common ways to get there:³

Selling the crypto for U.S. dollars or another government currency.
Swapping one crypto for another. Trading Bitcoin for Ethereum is a disposal of the Bitcoin, and if the Bitcoin’s value at the moment of the swap is below your cost basis, that’s a capital loss.
Paying for goods or services with crypto. Spending it is treated the same as selling it at fair market value.

The deduction only works if the crypto was held as a capital asset, meaning you bought it as an investment or for personal use. If you run a business that holds crypto as inventory for sale to customers, different rules apply.

One important boundary: losing your private key or being locked out of a wallet is not a realized loss. You still technically own the asset, and the IRS wants a completed transaction before it lets you write anything off.

How Much You Can Deduct in One Year

Capital losses run through a specific netting order. Short-term losses first cancel short-term gains, long-term losses first cancel long-term gains, and any remaining net loss on one side spills over to absorb gains on the other. Only after every gain is gone do you get to the ordinary-income deduction.

That deduction is capped at $3,000 per year, or $1,500 if you file as married filing separately.² Anything above that rolls into next year and keeps rolling until it’s used up.⁴

Say you realize $50,000 in crypto losses this year and have no capital gains. You deduct $3,000 against your wages and carry $47,000 forward. Next year you sell some stock at a $30,000 gain. The carryforward wipes out the entire gain, and you still have $17,000 of loss sitting there for the year after. You have to report the carryover on each return to keep it alive.

Short-Term vs. Long-Term Matters

How long you held the crypto before disposing of it determines whether the loss is short-term (held one year or less) or long-term (held more than one year).⁵

The classification changes what your loss is worth. Short-term gains are taxed at ordinary income rates as high as 37%. Long-term gains get preferential rates of 0%, 15%, or 20% depending on your income.⁶ A short-term loss that cancels a short-term gain is saving you tax at that higher rate, so it’s more valuable than a long-term loss offsetting a long-term gain. When you’re deciding which lots to sell, that arithmetic is worth running.

Picking the Cost Basis Method

Your cost basis is what you paid for the crypto, including exchange fees and gas fees at purchase. The gap between proceeds and basis is your gain or loss. When you bought the same coin at different times and prices, the method you use to identify which units you’re selling directly changes the loss you can claim.

The IRS accepts two methods:

FIFO, or first in, first out. The earliest units you bought are treated as the first ones sold. This is the default if you don’t specifically identify what you’re selling.³
Specific identification. You designate exactly which units you’re selling by documenting a unique identifier such as a public or private key or address, plus the acquisition date and time, your basis, and the fair market value at acquisition. It’s more work, but it lets you pick the highest-cost lots to maximize the loss.³

Under 2024 final regulations, FIFO applies on a per-wallet or per-account basis beginning January 1, 2025.⁷ You can no longer treat your holdings as one big pool across every exchange and wallet. If you hold Bitcoin on two exchanges, each is tracked separately. Taxpayers were allowed to allocate existing basis to specific wallets and accounts by deadlines tied to the 2025 tax year. If you missed that window, your basis was assigned within each wallet using the default FIFO rule.

The Wash Sale Question

Tax-loss harvesting means deliberately selling a losing position to lock in the deduction, then reinvesting. With stocks, the wash sale rule under IRC Section 1091 blocks the loss if you repurchase the same or a substantially identical security within 30 days before or after the sale. Because the IRS classifies cryptocurrency as property rather than a stock or security, that rule has historically not applied to most crypto.

In practice, that lets a crypto investor sell Bitcoin at a loss on Monday and buy it back on Tuesday while still claiming the full deduction. But the picture is changing at the edges. The Form 1099-DA that brokers began issuing in 2026 includes a field for disallowed wash sale losses on tokenized securities, so digital assets that represent traditional stocks or bonds already get the wash sale treatment.⁸ Congress has repeatedly proposed extending wash sale rules to all digital assets. Treat the current window as one that could close.

One other thing to weigh: selling and repurchasing resets the holding period. Crypto you’d held for 11 months, one month away from long-term treatment, goes back to day one. That reset can cost you the preferential long-term rate on a future sale.

Losses From Scams, Hacks, and Exchange Bankruptcies

If your loss came from a collapsed exchange or a scam rather than a market drop, the rules get harder to work with.

Frozen Accounts and Bankrupt Exchanges

While bankruptcy proceedings are ongoing, you can’t claim a loss. The IRS wants a closed and completed transaction, and frozen assets don’t qualify.⁹ Once the bankruptcy concludes:

If you received a partial settlement, treat the settlement as a sale. Subtract what you got from your cost basis and report the capital loss on Form 8949 in the year of the settlement.
If you received nothing, the worthless-investment path is largely blocked. Cryptocurrency generally isn’t a “security” under IRC Section 165(g), which is the provision that covers worthless stocks and bonds. Worthless crypto has historically been treated as a miscellaneous itemized deduction, and that deduction was suspended by the Tax Cuts and Jobs Act and made permanent, so it isn’t available to most individual taxpayers.¹⁰

You still have to report any Form 1099 you receive from the exchange even while your account is frozen.⁹

Theft, Scams, and Rug Pulls

A theft loss deduction under IRC Section 165 may be available, but only for a loss tied to a profit-seeking transaction. IRS Office of Chief Counsel guidance issued in 2025 confirmed three requirements: the loss must result from conduct that qualifies as theft under your state’s law, you must have no reasonable prospect of recovering the funds, and the transaction that produced the loss must have been entered into for profit.¹¹ You claim the loss in the year you discover the theft, provided recovery isn’t reasonably expected.

Personal casualty and theft losses that aren’t tied to a profit-seeking transaction are deductible only when they arise from a federally or state-declared disaster, and that limitation is now permanent.

How to Report It on Your Return

The digital asset question sits near the top of every Form 1040. You have to check “Yes” if you received, sold, exchanged, or otherwise disposed of any digital asset during the year.¹² Answering “No” when you had reportable transactions is a flag the IRS can use against you.

The reporting itself lands on two forms.

Form 8949

Every disposal gets its own row. You enter a description of the asset, the acquisition date, the sale date, the proceeds, and your cost basis. The difference in column (h) is your gain or loss.¹³ If you traded actively, this form can run to many pages. Tax software and crypto-specific tools can pull the entries directly from exchange data.

Schedule D

Totals from Form 8949 feed into Schedule D of Form 1040, where the netting happens. Schedule D combines your short-term and long-term results and figures out how much loss you can deduct this year and how much rolls forward.⁴ The real work is on Form 8949; Schedule D mostly moves subtotals into the right lines.

Form 1099-DA From Your Broker

For transactions on or after January 1, 2026, cryptocurrency brokers must report sales of digital assets to you and the IRS on Form 1099-DA.¹⁴ The form reports the token, the number of units sold, the sale date, and gross proceeds.⁸ For covered securities, brokers also report acquisition date, basis, and holding-period classification. For noncovered ones, the basis fields can be blank, and you’re still responsible for supplying that information. If you moved crypto between wallets or exchanges before selling, the broker who ultimately sold it probably won’t have your original purchase data. Numbers on your return that don’t match what the broker reported will draw a notice.

Records to Keep

Keep supporting documentation for at least three years from the date you file. If you underreport gross income by more than 25%, the IRS has six years to come back.¹⁵

For crypto, that means saving exchange transaction histories, wallet addresses, timestamps, and any record showing what you paid when you acquired each asset. If you used specific identification, hold on to the documentation showing which units you designated for each sale. Exchanges shut down, get hacked, or restructure, so relying only on platform records is a mistake. Export your transaction history regularly and keep backups somewhere you control. If you’re carrying forward a large loss for years, you’ll need this documentation on every return that uses a piece of it.

1
Internal Revenue Service. IRS Notice 2014-21
2
Office of the Law Revision Counsel. 26 US Code 1211 – Limitation on Capital Losses
3
Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions
4
Internal Revenue Service. 2025 Instructions for Schedule D Form 1040
5
Office of the Law Revision Counsel. 26 US Code 1222 – Other Terms Relating to Capital Gains and Losses
6
Internal Revenue Service. Topic No 409 Capital Gains and Losses
7
Internal Revenue Service. Revenue Procedure 2024-28
8
Internal Revenue Service. 2026 Instructions for Form 1099-DA Digital Asset Proceeds From Broker Transactions
9
Taxpayer Advocate Service. TAS Tax Tip When Can You Deduct Digital Asset Investment Losses
10
Office of the Law Revision Counsel. 26 US Code 165 – Losses
11
Taxpayer Advocate Service. IRS Chief Counsel Advice on Theft Loss Deductions for Scam Victims
12
Internal Revenue Service. Determine How to Answer the Digital Asset Question
13
Internal Revenue Service. Instructions for Form 8949 2025
14
Internal Revenue Service. Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets
15
Internal Revenue Service. How Long Should I Keep Records