3 Proven Ways Crypto Traders can Avoid IRS Problems and Slash Their Taxes

3 Proven Ways Crypto Traders can Avoid IRS Problems and Slash Their Taxes

Despite what you may have been hearing, or experiencing, crypto traders can avoid IRS problems. Ideally, you also want to slash your taxes. And you want to achieve both for good reasons. The good news is, it’s possible with these three proven ways.

Many crypto traders have lost assets investing in Ponzi schemes, bogus ICOs, have accidentally locked themselves out of a wallet, have had an exchange close down keeping your coins, and have experienced a phishing scam, etc. Can you relate?

Many people have also heard that the big tax law change in December of 2017 eliminated the personal casualty loss deduction. Consequently, for 2018 and forward, traders thought there were no more deductions for such crypto losses.

However, the tax law differentiates between personal casualty losses and losses of investments entered into for profit. The later is still deductible. Who doesn’t buy cryptos to make a profit? So almost all crypto losses are investment losses.

Investment loss of cryptos divides into two types: loss from fraud (i.e. Ponzi scam, financial fraud, MtGox exchange closures, etc.) and capital loss (lost wallet, lost/stranded coins, etc.).


Crypto Traders can avoid IRS problems

A capital loss is recorded on form 8949 (basis not reported to IRS). Enter the sale price as $0. I also recommend providing a disclosure on form 8275, preferably in the format of a legal affidavit, which is what it is. This type of loss reduces your capital gains.

Read More: Crypto Trader Saves $471,000 on Taxes


Crypto Traders can avoid IRS problems

Fraud losses, on the other hand, are treated as deductions, not capital losses. The challenge of a fraud or Ponzi loss is that you can’t obtain or trust the transaction and inventory records. As a result of the Bernie Madoff Ponzi scam, the IRS created a “safe harbor” method of declaring the loss which reduces your risks of not having records.

The key to the safe harbor rule is showing that the loss occurred in a year during which the operators of the fraud are indicted or sued. So I recommend looking for a dated web news article reporting the indictment or better yet a copy of the indictment.

If the fraud loss wasn’t newsworthy, such as a phishing loss, you can still deduct the loss, but there is no safe harbor defense if audited unless you have records to substantiate your investment basis and loss. The worst case is you lose the deduction claim.


Crypto Traders can avoid IRS problems

A Ponzi loss is recorded on form 4684. The total loss calculated on this form is entered on to Schedule A-Itemized Deductions. The standard deduction is now $12,000 single/$24,000 married. So you can itemize deductions if they exceed the standard deduction. Small Ponzi losses might be inconsequential on a return.

I had one client with a $139,000 Ponzi loss deduction. It completely offset all her taxable income resulting in a $0 taxes owed. Plus she got to carry over the excess as a net operating loss for the next year to reduce that year’s liability too. Sweet!

Important Note: On a Ponzi loss, the safe harbor rule only allows you to deduct your basis or cost of the assets put into the bogus investment. You can’t deduct any alleged appreciation of the investment that may have taken place before the loss. You only get to deduct what you invested.

Read More: Avoiding the IRS Crackdown


As you can see, claiming an investment loss can create a great tax break. It’s also possible as a crypto trader to avoid problems with the IRS. But if you’re still finding it to be a daunting task or your situation is complicated, don’t take the risk or stress yourself out – schedule a call with me now to discuss fixing your crypto tax problems.

Do you want to better understand what all the IRS knows about crypto traders? Check out my books about crypto trading.

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It is a very common story I hear. An individual has huge gains trading crypto-to-crypto in 2017. In Spring 2018, he asks his accountant if he has to report the trading on his return. The accountant is clueless. The investor knows his return is not being done right.

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Avoiding the IRS crackdown

All American crypto traders should know that the IRS is gearing up for large compliance campaign (read crackdown) on crypto traders.[1]

The IRS commission said in November 2018, “You think the IRS doesn’t know [who the cryptotraders are]? The IRS will have more information about them than you can possibly imagine.”[2]

Clinton Donnelly has written a book to show traders how to protect themselves. He is an Enrolled Agent with a law degree experienced in defending taxpayers from the IRS at examinations, audits, and appeals.

Continue reading “Avoiding the IRS crackdown”