Sold Crypto at a Loss? You Probably Still Had to Report It

Quick answer: One of the most common crypto tax mistakes is assuming that if you sold at a loss, you did not have to report it. You almost certainly did. Selling or exchanging cryptocurrency is a reportable event whether you made money or lost it, and leaving a loss off your return is exactly the kind of gap that leads the IRS to send a compliance letter.

The good news is that reporting a loss usually costs you little or nothing in tax, and it can actually save you money. If you did not report and now hold IRS Letter 6174, this explains what that means and how to fix it. Call (415) 968-1780 for a privileged consultation.

Plenty of honest taxpayers skipped reporting crypto sales for a simple reason: they lost money and assumed a loss was not the IRS’s business. It is. Understanding why turns a scary-looking letter into a manageable cleanup.

Do you have to report crypto if you sold at a loss?

Yes. For federal tax purposes, selling cryptocurrency, trading one coin for another, or using crypto to buy something are all dispositions of property, and dispositions are reported regardless of whether the result is a gain or a loss.

The IRS does not only want to hear about your winners. It expects every disposition on the return, with the loss calculated the same way a gain would be. A loss you never reported is still a missing transaction from the IRS’s point of view.

Why a loss still has to go on your return

Cryptocurrency is treated as property, so each sale is reported on Form 8949 and summarized on Schedule D, with your cost basis subtracted from your proceeds to produce a gain or a loss.

When an exchange reports your sale to the IRS but your return shows nothing, the records do not match. That mismatch is what the IRS’s matching systems flag, and it does not distinguish between a profitable sale you hid and a losing sale you simply assumed did not count.

Separately, recent returns ask a direct digital-asset question near the top of Form 1040, and answering it incorrectly while having unreported activity compounds the problem.

Reporting the loss can actually help you

Here is the part that surprises people. A reported capital loss is useful. It offsets capital gains dollar for dollar, and if your losses exceed your gains, you can generally deduct a limited amount against ordinary income each year and carry the rest forward to future years.

In other words, the transaction you left off the return because it “was just a loss” might have reduced your tax if you had reported it. Fixing the omission is not only about compliance; it can put money back on your side of the ledger.

What it means if you didn’t report and got Letter 6174

If you never reported those losing sales and then received IRS Letter 6174, the letter is telling you the IRS has data tying you to crypto activity that it does not see fully reflected on your returns. Letter 6174 is a soft, educational letter that requires no response, but it is not an all-clear. It is a prompt to get your prior filings right before the matter escalates.

For the full breakdown of the letter and how it compares to the stricter 6173 and CP2000 notices, see our guide, IRS Letter 6174 (crypto): what it means and what to do.

How to fix unreported loss years

The fix is usually straightforward, which is the reassuring news for most people in this situation. Where the earlier omission was an honest mistake, filing accurate amended returns that include the missing dispositions is often the right path, and because the transactions were losses, the additional tax is frequently small or zero.

The important caveats are two. First, you need accurate records to compute basis and proceeds across every year and every exchange, which can take some reconstruction. Second, if there is any chance the IRS could view earlier conduct as willful rather than a genuine misunderstanding, the analysis changes, and you should assess that under attorney-client privilege before filing anything.

Our cryptocurrency accounting and audits practice handles both the reconstruction and the legal judgment, and our guide to Form 1099-DA explains what exchanges are now reporting about you.

Talk to a crypto tax attorney before you amend

If you sold crypto at a loss, never reported it, and received Letter 6174, get a privileged review before you file. It is usually a fixable problem, and it is better fixed on your timeline than the IRS’s. Schedule a paid, privileged consultation with Kugelman Law by calling (415) 968-1780 or visiting our contact page.

In one federal matter, two IRS Notices of Deficiency proposing more than $557,000 across six years were settled in U.S. Tax Court down to roughly $38,000, and with avoided interest and California exposure the client effectively saved over $1.2 million. Results depend on specific facts. Past results do not guarantee future outcomes.

Frequently asked questions

Do I have to report crypto if I sold at a loss?

Yes. A sale or exchange of cryptocurrency is a reportable disposition whether it produced a gain or a loss. The loss is calculated and reported the same way a gain would be, on Form 8949 and Schedule D. Leaving it off creates a mismatch with the data the IRS receives from exchanges.

What happens if I never reported crypto losses from past years?

The transactions are treated as missing from your returns, which can trigger a compliance letter like 6174. The usual fix is accurate amended returns, and because the sales were losses, any additional tax is often small or zero. Assess your facts with counsel first if willfulness could be in question.

Can reporting a crypto loss lower my taxes?

Often, yes. Capital losses offset capital gains dollar for dollar, and net losses can generally offset a limited amount of ordinary income each year, with the remainder carried forward. A loss you failed to report may have reduced your tax if it had been included.

Why did I get Letter 6174 if I only lost money on crypto?

Because the IRS received information that you disposed of cryptocurrency, and it does not see those dispositions on your return. The system flags the mismatch regardless of whether you gained or lost. Letter 6174 requires no response, but it signals that your prior reporting should be reviewed.

Is it too late to fix old unreported crypto sales?

Usually not. Amended returns can correct prior years, subject to the applicable statute of limitations, and loss years are typically the least painful to fix. The key is accurate records and, where willfulness could be a question, a privileged assessment before filing.

About the author

Alex Kugelman is the founder and managing attorney of Kugelman Law and is nationally recognized for cryptocurrency tax. He has spoken on digital-asset tax and IRS enforcement on the Bitcoin.tax podcast and The Mark Milton Show. With nearly two decades of federal tax controversy experience, he is admitted in California and before the U.S. Supreme Court, the U.S. Tax Court, and the U.S. District Court for the Northern and Eastern Districts of California, and served as San Francisco Chair of the Federal Bar Association Tax Division in 2018. For matters that reach into IRS examinations, his colleague Otto Bosch, a former IRS Revenue Agent from the Global High Wealth group, leads the firm’s federal audit-defense work.

This article is attorney advertising and general information, not legal advice. How a given transaction is reported, and which compliance path fits, are fact-specific determinations. Contacting Kugelman Law does not create an attorney-client relationship.