Recent Crypto Market Rally and Associated Tax Breaks
The latest crypto market rally may have been a boon to digital currency investors, but those still struggling with losses from the past year may be able to score a tax break on their 2022 returns. In 2022, the global crypto market faced a series of bankruptcies, liquidity issues, and the collapse of FTX, one of the largest crypto exchanges, resulting in a total loss of nearly $1.4 trillion.
Tax-Loss Harvesting
The silver lining of plummeting assets is the chance to take advantage of tax-loss harvesting. This is when losses offset gains in a portfolio. By subtracting the sales price from the original purchase price (i.e. the “basis”), investors can claim the loss on their returns by filing Schedule D and Form 8949. These losses can be used to reduce any other portfolio profits up to $3,000, and any other losses above this amount can be used in future years.
Other Tax Concerns
When it comes to crypto taxes, investors may have some lingering questions regarding lost deposits and income from rewards or interest. Generally speaking, investors may be able to claim a capital loss for any complete losses (i.e. if you wind up only receiving 10% of the equivalent value, this 10% becomes regular income).
IRS Regulations
In 2021, the US Congress passed an infrastructure bill requiring digital currency “brokers” to send Form 1099-B, which details an asset’s profits or losses, annually. Despite this, the IRS delayed this rule late in December of 2021. Some exchanges have complied, however, regardless of whether you receive the form, it is still pertinent to accurately report any crypto activity. Since 2019, the IRS has included a question regarding crypto on the front page of the tax return, and the agency has also pursued customer records by sending court orders to multiple exchanges.
2021 Tax Advice
CPA and tax attorney Andrew Gordon, president of Gordon Law Group, has advised clients to wait and see if further clarity on their losses is provided before filing. He recommends that filing an extension may be the most beneficial strategy if investors held significant holdings on any of the affected exchanges.
Overall, the IRS has five years of information on taxpayers and if income from crypto has not been reported, they may face targetting and penalties. To ensure that investors are not subjected to any fines or other inconveniences, it is essential that all crypto activity is accurately detailed and reported on tax returns.
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