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Investors may be able to offset their losses by reporting cryptocurrencies when submitting their taxes.
The crypto market experienced difficulty in 2022. According to new research by security services provider Immunefi, the cryptocurrency sector would lose $3.9 billion in total by 2022.
Even while negative losses like this are sometimes troubling for cryptocurrency investors, there could be a benefit to those who record their cryptocurrency holdings on their taxes.
Although cryptocurrency investors achieved significant profits in 2021, Lisa Greene-Lewis, a certified public accountant at TurboTax, told Cointelegraph that things changed significantly in 2022. We’ve seen a crypto winter, and TurboTax wants to assist investors in managing their losses, the spokesperson added. Tax-loss harvesting is the most crucial idea to remember when it comes to tax filing cost savings, according to Greene-Lewis. She uttered:
“With crypto, you can offset gains with losses. Any leftover losses can be offset up to $3,000 against ordinary income like wages. Losses exceeding $3,000 can be carried forward to the next tax year.”
As more new, youthful investors get into the cryptocurrency market, tax-loss harvesting understanding is becoming more crucial, according to Greene-Lewis. 16% of Americans have invested in, traded in, or utilized cryptocurrencies, according to a Pew Research Center poll that was mentioned in the most recent tax trend report from TurboTax. More than any other age group, those between the ages of 25 and 34 are most likely to conduct bitcoin sales transactions. Many of these people are not aware of tax-loss harvesting, according to Greene-Lewis.
Greene-Lewis added that investors in cryptocurrencies can still carry out this activity since those losses roll forward even if the deadline for selling tax losses for the year 2022 passed on December 30.
Tax-loss harvesting is a terrific alternative for Bitcoin investors, according to Steven Lubka, vice president of Swan Global Wealth, Swan Bitcoin’s private client services division.
“This tax method is arguably the most practicable. Although most people were unaware that tax-loss harvesting was a possibility, Swan Global Wealth works with private customers to offer insightful market analysis, he added.
Further, Lubka noted that the absence of a “wash sale rule” that would block the tax deduction if an investor purchased the same item 30 calendar days before or after the sale makes tax-loss harvesting advantageous. This implies that cryptocurrency investors may promptly purchase back their assets after selling them while locking in their tax loss. Although there are certainly benefits to this, Lubka predicts that things will probably alter soon.
Another approach for cryptocurrency investors to lower their taxable income is by making charitable donations, which may be a smart move during a bull market. According to Alex Wilson, co-founder of The Giving Block, a bitcoin contribution platform, giving cryptocurrencies is tax efficient since it spares investors from paying capital gains tax.
According to Wilson, The Giving Block has observed an increase in cryptocurrency donations in recent months, particularly as investors become more aware of the advantages. He said that nonfungible token (NFT) philanthropy is gaining traction and predicted that this year will be a major one for donations because cryptocurrency is already on the increase. Nearly 30% of donations to The Giving Block have come through NFTs. Wilson claims that the operation of NFT contributions is the same as that of crypto donations.
An further method for cryptocurrency investors to lower their taxable income is through individual retirement accounts, or IRAs. Traditional IRA investments grow tax-deferred, so participants won’t have to pay income tax on the growth of their money until they withdraw it. This is similar to a 401(k).
Although there has lately been debate regarding Americans utilizing their IRA funds to buy digital assets, Lubka said that the alternatives for IRAs that focus on cryptocurrencies are expanding.
He gave the example of Swan Bitcoin launching a low-cost Bitcoin IRA that would be available to all users of the site in the upcoming weeks. Traditional IRAs impose astronomical costs. Swan’s Bitcoin IRA charges just.25% in annual fees, he noted. Given that many millennials and boomers want cryptocurrency to be a part of their 401(k) retirement plans, such a product is likely to be popular among crypto investors, according to a recent Charles Schwab poll.
Even though there seem to be various advantages to including bitcoin in your tax return filing, many cryptocurrency investors are still unaware of this. For context, the “2023 Annual Crypto Tax Disclose” from CoinLedger, a crypto and NFT tax software startup, revealed that 31% of investors asked did not report their crypto on their taxes, with half not doing so because they did not earn a profit and 18% not even being aware that crypto was taxable.
The Internal Revenue Service and other governmental organizations need to give better information to educate cryptocurrency investors about taxes, according to David Kemmerer, co-founder and CEO of CoinLeder. For instance, he made the point that it’s crucial for cryptocurrency owners to comprehend how the 2021 infrastructure bill may affect the environment for crypto tax reporting.
The 2021 infrastructure bill would probably force “cryptocurrency brokers” to deliver 1099-Bs, a particular kind of 1099 that discloses capital gains and losses from stocks or properties, to the IRS for the 2023 tax year, claims CoinLedger’s 2023 study. Since the IRS is currently working on defining what a “crypto broker” is, the release of crypto tax reporting regulations describing these processes has been postponed.
Pat White, the CEO of Bitwave, a platform for tax, accounting, and compliance for cryptocurrency, also told Cointelegraph that wash trading regulations from the IRS should worry crypto investors in the future. He did point out that in this situation, there are still opportunities for tax-loss harvesting. Investors may be able to convert their coin investments to other assets. For instance, Bitcoin might be converted into wrapped Bitcoin, which would satiate the wash trade requirements but result in a loss, he said.
White said that people operating an Ethereum 2.0 node are in fact getting paid every day. He pointed out that as a result, these users would need to decide whether or not incentives would be considered income in 2022. After the Shanghai update allows for the withdrawal of staked Ethereum, this will become crucial.
