2022 was tough for the crypto market. A recent report published by security services platform Immunefi found that the crypto industry lost a total of $3.9 billion in 2022.
Detrimental losses such as these are often concerning for crypto investors, yet there may be a silver lining behind decreasing assets for investors reporting crypto on their taxes.
Lisa Greene-Lewis, a certified public accountant at TurboTax, told Cointelegraph that while crypto investors made huge gains in 2021, this changed drastically in 2022. “We have seen a crypto winter occur, and TurboTax wants to help investors cope with their losses,” she said. According to Greene-Lewis, tax-loss harvesting is the most important notion to keep in mind when it comes to saving money when filing taxes. She said:
“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.”
Greene-Lewis explained that as new, young investors enter the crypto market, awareness around tax-loss harvesting is becoming more critical. According to a Pew Research Center survey cited in TurboTax’s latest tax trend report, 16% of Americans have invested in, traded or used cryptocurrency. Individuals between the ages of 25 and 34 are more likely to have cryptocurrency sales transactions than any other age group. “Many of these individuals are unaware of tax-loss harvesting,” Greene-Lewis said.
While the last day for tax-loss selling for 2022 passed on Dec. 30, Greene-Lewis reiterated that crypto investors can still perform this action since those losses roll forward.
“This is probably the most actionable tax strategy. Swan Global Wealth works with private clients to provide valuable market insights, yet most individuals did not know that tax-loss harvesting was an option,” he said.
Lubka further pointed out that tax-loss harvesting is beneficial because there is currently no “wash sale rule” applied to crypto, which would prevent the tax break if an investor bought that same asset 30 calendar days before or after the sale. “This means that crypto investors can sell their assets and then instantly buy those back while locking in the loss on their taxes.” While this is certainly advantageous, Lubka believes that this process will likely change in the near future.
Donating to charity is another way for crypto investors to reduce their taxable income, which can be a good strategy during a bull market. Alex Wilson, co-founder of The Giving Block — a crypto donation platform — told Cointelegraph that donating cryptocurrency is tax efficient because it allows investors to avoid capital gains tax. He said:
“If an investor bought Bitcoin at $1 and sold it at current market prices, that would normally be taxed. But if you donate the Bitcoin to a nonprofit, it becomes tax deductible. These deductions are even higher when donated to a 501(c)(3) charity.”
Wilson shared that The Giving Block has seen an increasing number of crypto donations over the past year, especially as investors become more aware of the benefits. “I expect this year to be big for donations because crypto is already on the rise,” he said, adding that nonfungible token (NFT) philanthropy is gaining momentum. “The Giving Block has seen almost 30% of its donations coming from NFTs.” According to Wilson, NFT donations function the same as crypto donations.
Individual retirement accounts, or IRAs, are yet another way for crypto investors to reduce their taxable income. Similar to a 401(k), assets held in traditional IRAs will grow tax-deferred, meaning investors won’t have to pay income tax until assets are taken out.
While there has recently been controversy around United State citizens purchasing digital assets using funds in IRAs, Lubka noted that crypto-focused IRA options are improving.
For instance, he explained that in the coming weeks, Swan Bitcoin will launch a low-fee Bitcoin IRA accessible to all the platform’s users. “Traditional IRAs charge exorbitant fees. The only yearly fee with Swan’s Bitcoin IRA is .25%,” he said. Such a product is likely to gain traction with crypto investors, with a Charles Schwab survey recently finding that many zoomers and millennials would like to have crypto as part of their 401(k) retirement plans.
Things to consider moving forward
Although there appear to be several benefits associated with reporting cryptocurrency when filing a tax return, there is still a lack of awareness among many crypto investors. To put this in perspective, the “2023 Annual Crypto Tax Report” from CoinLedger — a crypto and NFT tax software company — found that 31% of investors surveyed did not report their crypto on their taxes, with half not doing so because they didn’t make a profit and 18% not even knowing crypto was taxable.
David Kemmerer, co-founder and CEO of CoinLeder, told Cointelegraph that the Internal Revenue Service and other government agencies need to provide better guidance to educate crypto investors about taxes. For instance, he pointed out that it’s important for crypto holders to understand how the 2021 infrastructure bill may impact the crypto tax reporting landscape.
According to CoinLedger’s 2023 report, the 2021 infrastructure bill will likely result in “cryptocurrency brokers” having to send 1099-Bs — a specific type of 1099 that reports capital gains and losses from securities or properties — to the IRS for the 2023 tax year. As of now, crypto tax reporting rules detailing such procedures have been delayed because the IRS still needs to develop the definition of a “crypto broker.”
Pat White, the CEO of Bitwave — a crypto tax, accounting and compliance platform — further told Cointelegraph that crypto investors should be concerned that the IRS might impose wash trading rules in the future. However, he noted that there are still options for tax-loss harvesting in the case of this scenario. “Investors could find ways to exit their coin positions into different assets. For example, Bitcoin could go into wrapped Bitcoin, which could satisfy the wash trading rules but would also harvest a loss,” he explained.
White further remarked that individuals running an Ethereum 2.0 node are technically receiving rewards daily. As such, he noted that these users would have to consider whether or not rewards would be recognized as income in 2022. This will become critical following the Shanghai upgrade allowing for the withdrawal of staked Ether (ETH). He said:
“The Shanghai fork will eventually drop, and people will be able to withdraw rewards. If you are reporting your taxes correctly, you will want to recognize this as income. However, users may be able to make advantageous tax decisions depending on when they want to recognize those rewards.”
This article does not contain investment advice or recommendations for tax report. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.