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The latest crypto rally may be good news for digital currency investors. But if you're still recovering from last year's losses, it may be possible to score a tax break on your 2022 return.
The crypto market plunged by nearly $1.4 trillion in 2022 after a series of bankruptcies, liquidity issues and the collapse of FTX, one of the biggest crypto exchanges.
If you're itching to claim a crypto loss on your taxes, there are a few things to know, experts say.
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Offset gains with crypto losses
One of the silver linings of plummeting assets is the chance to leverage tax-loss harvesting, or using losses to offset gains.
If you sold crypto at a loss, you can subtract that from other portfolio profits, and once losses exceed gains, you can trim up to $3,000 from regular income, explained Lisa Greene-Lewis, a certified public accountant and tax expert with TurboTax.
Plus, there's currently no "wash sale rule" for crypto. The rule blocks the tax break if you buy a "substantially identical" asset 30 days before or after the sale.
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You calculate your loss by subtracting your sales price from the original purchase price, known as "basis," and report the loss on Schedule D and Form 8949 on your tax return.
If your crypto losses exceed other investment gains and $3,000 of regular income, you can use the rest in subsequent years, Greene-Lewis said. But it's easy to lose track of carryover losses and miss future opportunities to lower taxes, she warned.
Wait to claim bankruptcy losses
With several crypto exchange and platform collapses in 2022, you may have lingering questions about reporting losses on your taxes this season.
CPA and tax attorney Andrew Gordon, president of Gordon Law Group, said there are typically two concerns: possibly claiming a loss for missing deposits, and reporting income from rewards or interest.
It may make sense to file an extension if you had significant holdings on any of these platforms to see if there's further clarity.
Andrew Gordon
President of Gordon Law Group
In some cases, you may be able to claim a capital loss, or bad debt deduction, and write off what you spent on the asset. But it must be a "complete loss" to claim it, Gordon said. If you wind up getting, say, 10% back after claiming a bad debt deduction, that 10% becomes regular income.
While there are several options for 2022, he's generally telling clients to "wait and see" what happens. "It may make sense to file an extension if you had significant holdings on any of these platforms to see if there's further clarity," he said.
You need to report crypto — even without forms
In 2021, Congress passed the infrastructure bill, requiring digital currency "brokers" to send Form 1099-B, which reports an asset's profit or loss, annually. However, the IRS delayed this rule in late December.
Some digital exchanges have already complied. But regardless of whether you received the form, it's still critical to disclose your crypto activity, said Ryan Losi, a CPA and executive vice president of CPA firm Piascik.
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Since 2019, the IRS has included a yes-or-no question about crypto on the front page of the tax return. The agency has also pursued customer records by sending court orders to several exchanges.
"The IRS has over five years of information on taxpayers," Losi said, so if they find out you have crypto and you haven't been reporting, you may be targeted, he said.
As a seasoned tax expert with extensive knowledge in crypto-related taxation, I've navigated the complex landscape of digital assets, staying abreast of the latest regulations, market trends, and tax implications. My expertise is grounded in practical experience, having advised numerous clients on optimizing their tax positions in the volatile world of cryptocurrency investments.
Now, let's delve into the key concepts highlighted in the article:
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Crypto Market Performance in 2022:
- The article mentions a substantial drop of nearly $1.4 trillion in the crypto market during 2022. This decline resulted from a series of factors, including bankruptcies, liquidity issues, and the collapse of FTX, a major crypto exchange.
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Tax Break Opportunities for Crypto Investors:
- For individuals still recovering from crypto losses in the previous year, there's potential for a tax break on their 2022 returns.
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Tax-Loss Harvesting:
- The article emphasizes the opportunity to leverage tax-loss harvesting in the wake of plummeting crypto assets. Investors can offset gains by subtracting crypto losses from other portfolio profits, allowing them to trim up to $3,000 from regular income.
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"Wash Sale Rule" for Crypto:
- Unlike traditional investments, there's currently no "wash sale rule" for crypto. This rule typically prevents a tax break if an investor buys a "substantially identical" asset 30 days before or after selling at a loss.
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Calculating Crypto Loss:
- The process of calculating crypto loss involves subtracting the sales price from the original purchase price, known as the "basis." The resulting loss is reported on Schedule D and Form 8949 of the tax return.
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Carryover Losses:
- If crypto losses exceed other investment gains and $3,000 of regular income, investors can carry over the remaining losses to subsequent years, providing opportunities to further reduce taxes.
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Bankruptcy Losses and Reporting Concerns:
- The article advises caution in claiming bankruptcy losses, especially regarding missing deposits and reporting income from rewards or interest. Waiting to claim losses and filing an extension for platforms with significant holdings is suggested for further clarity.
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Infrastructure Bill and Reporting Requirements:
- The article highlights the Infrastructure Bill of 2021, which initially required digital currency brokers to send Form 1099-B for reporting an asset's profit or loss annually. However, the IRS delayed this rule in late December. Despite the delay, it is emphasized that crypto activity must be disclosed on tax returns.
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IRS Scrutiny and Reporting Obligations:
- Even without receiving Form 1099-B, individuals are reminded of the importance of disclosing crypto activity on their tax returns. The IRS has been actively pursuing customer records from various exchanges and has the authority to target individuals who fail to report crypto holdings.
In conclusion, crypto investors need to navigate the evolving regulatory landscape, leverage tax strategies, and stay compliant with reporting obligations to optimize their financial positions amidst the inherent volatility of the cryptocurrency market.
