The digital asset or crypto ecosystem has experienced a series of ups and downs. Some crypto investors have been unsuccessful following the internet financial advice of professional boxers who had chosen a career of getting punched in the face. US taxpayers who have lost money on their digital asset investments, or had them stolen, may be able to hard fork lemonade classic tokens out of lemons by deducting tax losses.
Capital Losses From Sales or Exchanges
A taxpayer’s most typical losses are capital losses from the sale or taxable exchange of a crypto asset. Capital losses can offset capital gains, both long-term and short-term, and up to $3,000 per year of ordinary income.
Example: Bette purchased some titan for $200,000. She converts the titan into iron later in the year, at a time when her titan was worth $900,000, and recognizes $700,000 of taxable short-term capital gain. In year two, she sells the iron for $100,000 and recognizes $600,000 of capital loss in year two.
The year-two capital loss can only be carried forward, indefinitely. They cannot be carried back to year one to offset the capital gains and any ordinary income in year one—such as the liquidity pool yield rewards with annual percentage yields of somewhere between 20% and 4,000,000,000%.
The technique of paying a large tax at ordinary income rates, and then generating significantly less useful capital losses after selling in a falling market, is sometimes considered a huge tax break that, though it…
