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Lost your crypto wallet? You may not need to pay taxes

On Behalf of | Jun 13, 2022 | Cryptocurrency

If you have cryptocurrency in a digital wallet, you know that you need to keep track of the specific passwords and reminders that you were given when you downloaded it. If you lose any of that information, you may not be able to access the money you’ve invested.

Many people wonder how losing access to their cryptocurrency will impact their taxes (because people do lose access fairly often). Unfortunately, you can’t claim unrealized losses on your taxes. That means that until you sell your cryptocurrency for less than you paid for it, you won’t be able to take the losses on your tax return. At the same time, you also won’t have to pay for gains, because you haven’t traded or sold the currency.

In the U.S., cryptocurrency is a digital asset

The Internal Revenue Service treats cryptocurrencies much like stocks and bonds. As a digital asset, the currency is taxed at different rates. It may be taxed as capital gains or income. Some transactions are taxable, and others are non-taxable events.

Buying and holding cryptocurrency is a non-taxable transaction. If you recover your wallet or are able to transfer the balance to a new one, that also won’t be a taxable transaction, since the transfer is from you to yourself.

If you do sell your crypto in some way, or if you can spend it but not cash it out, you will owe taxes on those transactions in most cases. Spending crypto is, to the IRS, similar to selling it.

If you get paid in crypto, you may still need to pay taxes

Now, there are a few exceptions where your lost wallet could still cost you money. If someone pays you in crypto to that wallet and you lose it before tax time, you could have to claim that money as income. If you mine crypto and send it to the wallet, the same could be true.

This is a somewhat complex area of tax law, so it can be helpful to go over your situation with a professional. If your wallet is lost, remember that there are services that may be able to help you regain access.