The tax rules related to cryptocurrency (what the IRS now calls digital assets), are changing as rapidly as the virtual currency markets themselves. A case in point: If you have digital assets that have declined in value and you are hoping to write off the loss on your taxes pay close attention to these updates.
As a refresher, the IRS deem digital assets to be assets that do not exist in physical form and include “convertible virtual currency” and “cryptocurrency”, and they are treated as property under general U.S. tax principles.
The IRS is adapting the tax code on an ongoing basis to factor in income and transactions related to digital assets. Most recently changes to the tax code are addressing the deduction of cryptocurrency when the digital asset has lost value. The new guidance related to this issue is outlined below, keep in mind you may need to seek the advice of a qualified tax professional when it comes to this type of complex tax compliance topic:
The deduction of virtual currency losses on your tax return is disallowed unless the cryptocurrency itself is completely worthless. In the eyes of the IRS, the only time a specific deduction for digital assets will be allowed is:
- If the currency has no value on the open market. If the actual units of virtual currency are completely and universally eliminated the losses would be permitted.
- The deduction applies only if the virtual currency was not part of a trade or business transaction.
- If the first two points are covered, then the transaction would represent a non-deductible miscellaneous itemized deduction. This means that the value of all of your deductions would need to be high enough to warrant claiming itemized deductions instead of the standard deduction.
The taxpayer takeaway on digital asset losses: If your cryptocurrency has declined significantly in value, you may need to take steps to sell or abandon to have an allowable loss. In general, it is only beneficial to claim such a loss if your total deductions exceed the standard deduction (in 2023 this is $27,700 for married filing jointly and for single taxpayers and married filing separately it is $13,850) and you plan on itemizing your deductions.
The world of virtual assets is a new frontier for many taxpayers and the IRS realizes this and is working to ensure it can assess taxes equitably on all taxpayers regardless of the actual medium and method of their income. If you have been heavily involved or invested in transactions involving cryptocurrency, now is the time to ensure you know and comply with your tax obligations including those we have covered here. If you have questions, it is recommended to check in with a tax professional who is familiar with cryptocurrency tax regulations, especially those that are continuing to evolve with the virtual currency market.