Short answer: when you sell or trade crypto for less than you paid, you have a capital loss. Losses cancel out capital gains first. If you still have a net loss after that, you can deduct up to $3,000 a year from other income ($1,500 if married filing separately) and carry the rest forward to future years.
What the IRS sources say
- The IRS digital assets page says digital assets are treated as property, so selling or exchanging them produces a capital gain or loss.
- IRS Topic 409 says that if capital losses exceed capital gains, you can claim the lesser of $3,000 ($1,500 married filing separately) or your net loss from line 16 of Schedule D, on line 7a of Form 1040.
- The same page says a net loss above that limit carries forward to later years, figured with the Capital Loss Carryover Worksheet in Publication 550 or the Schedule D instructions.
- Gains and losses are short-term if you held the asset one year or less and long-term if you held it more than a year (Topic 409).
How the offset works
- Net short-term gains and losses against each other, and long-term gains and losses against each other.
- Net the two results together.
- If the total is a loss, deduct up to $3,000 ($1,500 married filing separately) against wages and other income.
- Carry any remaining loss forward. Carried-over losses keep their short-term or long-term character in later years.
Where to report
Each sale or trade goes on Form 8949, and the totals go to Schedule D. If your broker sent a Form 1099-DA, match its proceeds and basis, and fix any missing basis before you file, or a loss can look like a gain.
Harvesting losses before year end
Under current law the wash sale rule in IRC 1091 doesn't cover crypto held as property, but a 2026 bill would change that. Read our crypto wash sale guide before you sell and rebuy. Your bracket decides what a loss is worth; see 2026 crypto tax rates.
Software finds unrealized losses across wallets and exchanges and builds Form 8949 for you. CoinLedger (code CRYPTOTAX10 for 10% off) and Koinly both offer loss reports. Affiliate links; disclosure.
Large losses, many wallets, or prior years to fix? A crypto tax CPA can handle carryovers and amended returns. General information, not tax advice.
FAQ
Can I deduct crypto losses?
Yes, if you sold, traded or otherwise disposed of crypto for less than your basis. The IRS treats digital assets as property, so the loss is a capital loss reported on Form 8949 and Schedule D.
How much crypto loss can I deduct in one year?
Losses first offset capital gains without limit. If losses exceed gains, IRS Topic 409 lets you deduct the lesser of $3,000 ($1,500 if married filing separately) or your net loss against other income.
What happens to losses over $3,000?
You carry the rest forward to later years. The Capital Loss Carryover Worksheet in Publication 550 or the Schedule D instructions figures the amount.
Does a drop in price count as a loss if I still hold the coin?
No. A capital loss comes from selling or otherwise disposing of the asset for less than its adjusted basis. An unrealized drop in value isn't a reported loss.