In the current digital asset climate of plummeting values, frozen accounts, and bankruptcy filings, if you own investments in digital assets, such as virtual currency, cryptocurrency and/or non-fungible tokens (NFTs), you might wonder when it is appropriate to report losses on your tax return. 

The IRS considers digital assets to be property. The tax treatment of a digital asset transaction depends on the purpose of the digital asset in your hands. If you held or are holding digital assets as investments, the digital assets are considered capital assets and certain tax rules apply when determining gains and losses from these investments. (Note: This Tax Tip only addresses digital assets held for investment. If you held digital assets for a reason other than investment purposes, see IRS Publication 544, Sales and Other Dispositions of Assets, and IRS Notice 2014-21 for more information.)  

Sales 

If you sold the digital asset you held as an investment for less than your cost to purchase it, you have a capital loss. First, you will need to determine if your capital loss is a short-term loss or a long-term loss (use IRS Publication 544, Sales and Other Dispositions of Assets, to help you make this determination). Then use Form 8949 to calculate your capital gain or loss and report that gain or loss on Schedule D (Form 1040). If you exchanged your digital asset investment for property (including a different digital asset) other than cash, you will first need to value the property you received on the date of the transaction. For example, if the value is greater than your cost in the digital asset you gave up, then you have a capital loss, which you will report on Form 8949.  

Bankruptcy and Frozen Accounts 

How should you report your digital asset investment loss when it is worthless, near worthless, locked in bankruptcy proceedings, or has vanished?  

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