Are “Costs & expenses” deductible in the US? I’m using TaxAct and I’m at the point where I can manually enter other “profits” for crypto, but I figure I can also use those fields to enter deductions and losses. So I was going to enter the costs and expenses in there as well as my “lost” coins… Any thoughts?
Hi @mekial2222, There is some relevant commentary on your question in Koinly’s Crypto Taxes USA 2023: Ultimate Crypto Tax Guide (https://koinly.io/cryptocurrency-taxes/).
First, I would make one general comment based on my understanding of US tax rules: Costs & Expenses are more likely to be deductible if you are carrying on a crypto trading business as opposed to treating your crypto trading as investment activity subject to capital gains taxation. In the latter situation, prior to 2018 certain investment-related expenses were eligible for itemized deductions. For tax years 2018 through 2025, these deductions have been eliminated due to changes made in the Tax Cuts and Jobs Act (TCJA) of 2017. As a result, deductibility of fees and other expenses is limited to fees related to an acquisition or disposition of crypto. A fee or other expense incurred in conjunction with the acquisition of crypto can be added into the cost basis of the acquired coins. Conversely, a fee or other expense paid upon the disposition of crypto can be deducted from the proceeds received.
Re “Lost” or Worthless Coins
Koinly’s Guide says the IRS has issued new guidance on “worthless or abandoned” coins and it also discusses the IRS position on “lost” coins (both pasted below).
Update 2023
The IRS has released guidance clarifying its stance on for taxpayers with crypto assets worth less than $0.01 - and if you’re one of the unfortunate investors left with effectively worthless tokens like UST, it’s not good news. The IRS says there can be no deduction for losses on holdings which have dropped to less than one cent. Even if the asset appears “worthless or abandoned”, it has not been sold and therefore there is no disposal and no loss.
Tax on lost or stolen crypto
The IRS does not let crypto investors claim lost or stolen crypto as a capital loss. It’s a harsh stance and it wasn’t always this way. Prior to the Tax Cuts and Jobs Act, crypto investors could claim theft and casualty losses as a capital loss. However, since this bill came into effect, casualty and theft losses are no longer tax deductible. So if you’ve lost your crypto due to a hack, scam or because you’ve lost your private keys - you’re out of luck.
Losses that occurred prior to 2017 may be deductible as long as you can prove ownership of the assets and can provide a declaration or receipt of some kind from the exchange which specifies how much you lost in the hack.
So if you lose crypto - whether that’s from losing your private keys or to a scammer - you can’t claim any kind of deduction for it. The best thing you can do is simply write it off and disregard it from your calculations entirely.
In some circumstances - like with a rug pull - you’ll still be in possession of your asset, it will just be worthless. This is actually good news for US investors from a tax perspective as it means they can realize their loss by disposing of their asset and create a capital loss to offset against their gains. Here’s how to realize a loss:
- Sell your tokens on an exchange if possible.
- If your tokens are no longer listed on an exchange, you may be able to use a native or non-custodial wallet to swap them for another token.
- Send your tokens to a burn wallet.
Re Deductibiity of Transfer Fees
Transfer fees
Chances are if you’re transferring crypto from one wallet to another - you may pay a transfer fee for the privilege. If you’re paying this in fiat currency, this is tax free. However, more often than not you’re going to be paying for this transfer fee in cryptocurrency. In other words, you’re spending crypto. This is a taxable event and you’ll have to work out if you’ve made a profit. So while transfers are tax free, transfer fees are not if you paid the fee in cryptocurrency. You’ll need to calculate your cost basis and capital gain or loss.
The IRS has not yet issued clear guidance on whether transfer fees could be added to the cost base of an asset. While transaction fees definitely can be, it is unclear whether transfer fees would fall into the category of maintaining an asset - which are not allowable as part of a cost basis.
Hope this helps.
So in the US funds/coins/tokens (BNB, BTC, etc) I sent to a project that rugged before I realized any returns can’t be claimed in a tax software like taxact in the section after a cvs import where one can manually enter profits as a negative? Just interesting that koinly has these categories if they can’t be used… Guess some countries allow it… Okay just wanted to be clear…
“A fee or other expense incurred in conjunction with the acquisition of crypto can be added into the cost basis of the acquired coins. Conversely, a fee or other expense paid upon the disposition of crypto can be deducted from the proceeds received.”
Is this done automatically by Koinly? If not, is that what constitutes the aggregated “costs & expenses” category?
In most cases, Koinly automatically adds fees related to acqusitions of cryptoassets into the cost base of the acquired coins or tokens. Koinly also automatically deducts fees from the proceeds on dispositions of cryptoassets. These types of transaction fees do not ordinarily get tagged as “Costs” and included in the Expenses section of the Full Tax Report.
There are exceptions however. For example, I find that any acquisition of an NFT on the Tezos blockchain will result in two transactions being imported into Koinly. The purchase price of the NFT will be recorded as a Deposit and the transaction fee will be recorded as a Cost. This means I have to remove the Cost tag from the one tx and merge the two Deposit txns to ensure that the NFT has the approriate cost base going forward.