Learn whether you can claim crypto losses from FTX, BlockFi, and other platforms as tax deductions, including capital loss carryovers and other IRS tax rules.
Are Tax Deductions Possible for Crypto Losses on FTX and BlockFi
The recent implosions of major crypto lending platforms FTX and BlockFi have left investors wondering – can I write off these losses on my taxes? The short answer is yes, you may be able to claim crypto capital losses on your tax return. With the right documentation and approach, those losses from failed exchanges like FTX and BlockFi could translate to serious tax savings.
I know this year has been an emotional rollercoaster for crypto investors. Believe me, I feel your pain! But with some strategic tax planning, we can try to find a silver lining. This post will explore the ins and outs of deducting crypto losses on your taxes, including:
- How capital gains/losses work for crypto and the tax implications
- What it means for a cryptocurrency to be deemed “worthless”
- Capital loss carryovers – using losses to reduce taxes in future years
- Steps for reporting losses from FTX, BlockFi, or other platforms on your return
- Additional potential deductions related to crypto investments gone bad
- When it pays to work with a crypto-focused tax pro
I’ll try to break things down in simple terms to demystify the process. My goal is for you to walk away less stressed and with a game plan for mining some tax relief from your misfortune. Here goes nothing!
How Capital Gains and Losses Work for Crypto Taxes
First, a quick refresher on how cryptocurrency is treated by the IRS at tax time. In the US, crypto is considered property, like stocks or bonds. That means you incur a taxable capital gain or loss whenever you sell, trade, or otherwise “dispose” of your cryptocurrency.
- Selling crypto for fiat currency
- Trading one crypto for another
- Even transferring coins to another wallet or person
These are all potentially taxable “disposal” events.
For each event, you’ll need to compare the disposition value ($ proceeds) to your cost basis (what you paid to acquire the crypto).
- If the value is higher = capital gain subject to taxes
- If the value is lower = capital loss that can reduce taxes
Now here’s a crucial point – capital losses can offset capital gains.
- If you realized $10K in losses this year and $15K in gains, you’d only pay tax on the $5K net gain.
- The $10K loss helped offset $10K of the gain. Sweet!
With the bloodbath in crypto prices, I’m guessing many readers have losses far exceeding their gains for 2022. So let’s talk about how you might be able to deduct those losses to recover taxes paid in prior years or reduce future tax bills.
Claiming Worthless Cryptocurrencies as Total Losses
In many cases, certain cryptocurrencies can be deemed completely worthless – especially when key platforms like FTX or BlockFi collapse seemingly overnight. These drastic drops to $0 may qualify as a total loss for tax purposes.
But what makes a crypto worthless in the eyes of the IRS?
- The crypto trades at $0 for a sustained period
- Trading of the asset is halted on major exchanges
- The project announces it is shutting down
- Other factors that essentially eliminate all value
If you hold a worthless coin, you can recognize the capital loss even if you haven’t technically disposed of the asset (i.e. sold or traded the coins). The loss equals your cost basis in the crypto – what you paid to acquire it.
This total loss approach clearly applies for FTX Token (FTT) or BlockFi’s native token (BFI) in the wake of those company’s implosions. Both coins lost almost 100% of value instantly.
For situations like this, claiming worthlessness may be the optimal move tax-wise. You don’t have to wait around hoping for some recovery in value. Take the loss this year while the wounds are still fresh!
Carrying Crypto Losses Forward to Offset Future Tax Bills
Okay, so claiming losses sounds great…but what if your losses still exceed your capital gain offsets for the current tax year? Say you have $20K in losses after offsetting all gains. Can you still benefit?
Absolutely! Here’s where loss carryovers come into play. If unused losses remain after offsetting your gains for the year, you can carry over the excess to apply against future gains. Woohoo!
Here are the core aspects of carrying over crypto losses on your taxes:
- Losses offset future capital gains in upcoming years
- Carryover lasts indefinitely until the loss is fully utilized
- Apply losses to earliest year first, then onward
- Maximum $3,000 deduction per year against regular income
That last one is huge – even if you have no capital gains, you can use $3,000 of carried over losses to reduce your regular income each year.
- 2022 Losses = $50K
- 2022 Gains = $20K
- $30K excess loss carried forward
- Use $3K per year to lower taxable income for 10 years!
Over long periods, loss carryovers can really add up for crypto investors – especially after catastrophic years like 2022.
Reporting Crypto Losses on Your Tax Return
I won’t sugar coat it – reporting crypto activity on your taxes can be a challenge. Proper documentation and record-keeping are key!
You’ll report capital gains and losses on IRS Form 8949. Then totals carry over to the familiar Schedule D.
- Form 8949 – lista each disposal event and associated gain/loss
- Schedule D – summarizes all capital gains/losses
If claiming worthlessness for a crypto, simply list acquisition details like date acquired, cost basis, and “$0” proceeds. That generates the capital loss.
One thing to watch out for – the threshold for reporting crypto transactions is relatively low – just $10 of gains/losses. Many smaller disposals often go unreported.
But with major losses from FTX or BlockFi implosions, you likely eclipse the reporting threshold by a long shot. 📈 Time to cash in!
Other Potential Crypto Tax Deductions
Claiming capital losses is the most straight-forward approach to deducting crypto-related disasters like FTX and BlockFi. But depending on specific circumstances, investors may have additional options:
Crypto Theft or Fraud Losses
If assets were outright stolen or losses stem from provable fraud, an investor may be able to classify them differently – as theft or fraudulent losses.
- Can potentially deduct up to $10K [$20K joint] directly against ordinary income – no $3K cap!
- Subject to different deduction timing rules
- Requires proving theft occurred and filing police report
But the line between fraud and failure can be blurry with crypto bankruptcies. Tread carefully when claiming theft!
Bad Debt Deduction
In certain cases, unpaid debt from a failed crypto platform may qualify investors for a bad debt write-off.
- Applies mainly for loaning fiat/crypto and borrower defaulted
- Also very nuanced and timing-sensitive
Work closely with an advisor before pursuing this route!
Don’t forget about fees paid for exchange accounts, managed services, etc!
- Trading fees, interest, payment processing fees
- Advisory fees or crypto fund management expenses
- Tax prep fees related to crypto activity
Fees directly tied to investments may be deductible!
Consider Working with a Crypto Tax Pro
With the intricate rules around crypto taxes, you can probably tell this stuff gets complicated fast! When claiming losses from complex situations like FTX or BlockFi, having an expert guide you through the nuances can prove extremely valuable.
A savvy crypto-focused tax professional can help:
- Determine the optimal loss deduction strategies
- Classify losses appropriately as capital, theft, bad debt etc.
- Follow the technical reporting requirements properly
- Uncover other potential crypto-related deductions you may miss
Sure, tax pros cost money. But they may pay for themselves many times over in the tax savings they can uncover!
Even if you decide to file your own return, at least consult with a crypto tax specialist beforehand. They can ensure you avoid any costly mistakes or misreported information. Remember – the IRS treats crypto disposal events separately from typical stock/bond reporting.
Getting those details right is critical to defending your return if those grumpy IRS auditors come knocking! Don’t let small reporting errors wipe out your loss deductions.
Let’s Recap – Deducting Crypto Losses from FTX, BlockFi, and Beyond
Few things sting more than losing hard-earned money almost overnight because of other people’s poor decisions. My heart goes out to all feeling the pain from the FTX and BlockFi debacles this year. But even in dark times, you can still find rays of light if you know where to look!
In this case, that light is using capital and worthless asset loss deductions to recover taxes from the past and reduce future tax bills.
By properly documenting and reporting losses from failed platforms, catastrophic meltdowns can gain some redeeming tax advantages.
Every crypto loss provides an opportunity – an opportunity to pay less!
- Carefully record your basis, proceeds, and other details for disposal transactions
- Determine which losses qualify as worthless asset write-offs
- Use losses to offset gains first, then carry forward any remainder
- Claim $3K capital loss deduction each year, indefinitely
- Explore other options like theft deductions or bad debt
- Enlist professional help filing your complex crypto tax return
Following these steps empowers you to reclaim something positive after so much disappointment. And over the long run, those precious loss carryovers will keep working to chip away at your taxes for years.
Every little bit counts – especially when rebuilding financial strength in the aftermath of crypto crashes!
I know that probably still seems overwhelming. But stick with me…we’ll get through this! Now let’s forge ahead and get you those loss deductions you deserve!