Over the last few years, we have seen a drastic increase in people investing in cryptocurrency. However, with the current market, we have also seen a “crypto winter,” where crypto prices remained substantially lower than prior peaks and led to widespread losses. Along with this environment, we have also seen some crypto platforms filing for bankruptcy. If your crypto holdings were with a platform that has filed bankruptcy, you might be asking, “Can I get a tax break for my crypto losses?” And the answer is maybe.
What Can I Do If My Crypto Assets Are Frozen?
Suppose you held crypto at an exchange involved in bankruptcy proceedings, and your crypto assets are frozen. In that case, there may be claims made against the company, and a bankruptcy court will eventually determine the distribution of assets, if any are available. If an investment could still potentially be recovered, you cannot take a loss on your taxes yet.
While you are waiting to find out if you will recover any of your crypto or whether the crypto will be deemed unrecoverable, the best thing you can do is gather your documents related to your crypto account (CSV files, your trades, account balances, etc.) to provide proof of the value of your crypto.
Can I Get a Tax Break If My Crypto is Worthless?
Once a crypto company’s bankruptcy is settled and discharged, and your crypto is deemed worthless, you can offset the loss of the crypto based on what you paid for it against your gains, and offset any additional loss against ordinary income like wages up to $3,000. Any additional loss over $3,000 can be carried over to the following year.
What Tax Break Can I Receive If I Suffered a Loss Due to Selling My Crypto for Lower Than I Bought It For?
If you sold crypto for lower than what you purchased it for, you can offset the losing crypto against your capital gains and offset up to $3,000 of your net loss against ordinary income like wages. Any additional losses beyond $3,000 can be carried forward to the following year. Much like when selling losing stock investments, offsetting capital losses against capital gains or tax loss harvesting may save you money on your taxes.
Don’t worry about being a crypto or bankruptcy expert. With Frank Kapitza & Associates, our tax professionals will help guide you in how you might use any unrealized capital losses you may have from prior years, improving your tax outcome and lowering taxes owed. We specialize in investments and can assist you in preparing and filing your taxes, so you can be 100% confident they are done right. Contact us today for more information.
