CoinTracker's tax department has written a guide on cryptocurrency tax write-offs for US users here. We recommend consulting this guide first.
Note: Apart from regular capital losses, you must be extremely cautious when taking less frequently used write-offs such as nonbusiness bad debt, casualty losses, theft losses, worthless security deductions, and abandonment losses. If you don’t handle them correctly, you will definitely increase your chances of being audited. Even when handled correctly, the IRS may still question your position because your tax return pops up from the majority of returns with no special deductions. In many cases, the overall cost associated with audits and correspondence with the IRS could outweigh the tax savings you get from obscure write-offs. Therefore, consult with your tax adviser to evaluate the pros and cons before committing to some of these write-offs.
Marking a coin as lost/stolen:
This will essentially ignore any loss/gain on the coin.
- For US users, the Tax Cuts and Jobs Act passed in 2017. This lengthy tax law no longer allows for deductions of lost or stolen property as of January 1, 2018.
- If you are choosing to mark a coin as lost or stolen, you can create a manual send transaction and mark that transaction with the
losttag. Here's an example screenshot of marking a coin called BUB as lost:
- Depending on the circumstances, you may have additional recourse in a small number of situations to use the IRS code to claim losses on your cryptocurrency. For transactions before January 1, 2018, you can work with your accountant to fill out Form 4684 for Casualties and Thefts.
Write-off a loss of a coin:
This will essentially create a capital loss on an asset equal to the cost basis.
- If you had a coin become worthless (not lose 90% of its value — literally become worthless), you can sell / send the asset to a third-party address. This will trigger a full capital loss for the asset. If the coin is coming from a synced wallet or exchange, then this will be automatically registered.
- If the coin is completely illiquid, and you have no way of disposing of it, you can try to take the position that it should still be considered for a worthless asset deduction. This is a grey area of the tax code so continue at your own risk.
- In this case, you can choose to manually create a send transaction of that asset/coin and then edit the proceeds from the transactions page to be USD 0.00 - here's a screenshot of where to edit proceeds for a coin:
- This will effectively register as a 100% capital loss on that coin. If you decide to take this position, make sure to keep records showing that you tried all reasonable methods to dispose of the asset first, but it was not possible.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.
If you have any questions or issues, please reach out to our support team at https://www.cointracker.io/contact-us