Most cryptocurrency taxes are based on any capital gains you have from trading crypto: how much you made, minus how much you spent. But what if you made less than you initially spent — what if you only have losses?

Obviously, you won’t be taxed on a negative amount of money, but it’s important to include the full report on your tax return anyway. Let’s talk about why.

Reporting losses can prevent tax headaches

Did you know that almost every cryptocurrency exchange in the US reports information to the IRS? And did you know that most of the information being reported paints a very inaccurate picture of your capital gains?

This video explains a scenario we’ve seen countless times, where the IRS sends someone a monumental tax bill based on incomplete information:

It’s up to you, the taxpayer, to prove the amount of tax that you owe (or don’t owe). You need to report each of your cryptocurrency transactions for the tax year, demonstrating that you had an overall capital loss. Software like Bitcoin.Tax helps you build a report with everything you need.

When you’ve properly reported, you can avoid a tax nightmare like the one described above.

Reporting losses can save you money

Capital losses can be used to offset your capital gains, even outside of cryptocurrency investments. If you have capital gains from stock trades, for example, your cryptocurrency losses can count against that, effectively lowering your tax bill.

You can even use capital losses to offset up to $3,000 of ordinary income per year. Additional losses can be carried forward to future years. So if you’re looking to minimize your tax liability, reporting cryptocurrency losses on your tax return is a no-brainer!

Have more questions about your cryptocurrency tax return? Get personalized advice from a crypto tax attorney and CPA using our full-service tax preparation service.

Andrew Gordon is a cryptocurrency tax lawyer and Certified Public Accountant who has practiced cryptocurrency tax law since 2014. His firm, Gordon Law Group, has helped hundreds of virtual currency investors reconcile their crypto transaction data, file tax returns, amend previous returns, and fight crypto-related audits and tax bills.