After a tough year for crypto, you may be looking for ways to turn steep losses into possible tax breaks.
The digital currency industry lost nearly $1.4 trillion in 2022 after a slew of bankruptcies and liquidity issues, including the collapse of digital currency exchange FTX.
Before filing your tax return, however, there are a few things to know about reporting last year’s losses, according to financial experts.
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Crypto losses can offset investment gains
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.
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 and see’ before claiming 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 GordonPresident 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 must report crypto — even if you don’t get tax 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 receive the form, it’s still critical to disclose your crypto activity, said Ryan Losi, a CPA and executive vice president of CPA firm Piascik.
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.