After a rough year for cryptocurrency, taxes may not be a top priority for digital currency investors battered by steep losses. But the falling crypto market and the recent collapse of digital currency exchange FTX may affect next year’s tax bill — and beyond, according to financial experts.
However, it’s also possible to have profits even when the market drops, depending on when you bought and sold the assets. The IRS defines cryptocurrency as property for tax purposes, and you must pay levies on the difference between the purchase and sales price.
Despite recent losses, “gains from earlier in the year are still on the books,” said Andrew Gordon, tax attorney, CPA and president of Gordon Law Group. Typically, crypto trading is more active when the market is going up, and that’s when you are more likely to incur gains, he said.
While buying digital currency isn’t a taxable event, you may owe levies by converting assets to cash, trading for another coin, using it to pay for goods and services, receiving payment for work and more.Currently, the so-called “wash sale rule” which blocks investors from buying a “substantially identical” asset 30 days before or after the sale doesn’t apply to cryptocurrency, he said.
The strategy, known as tax-loss harvesting, may apply to digital currency gains, or other assets, such as year-end mutual fund payouts. After reducing investment gains, you can use up to $3,000 of losses per year to offset regular income.
If you’re sitting on crypto losses, there may be a silver lining: the chance to offset 2022 gains or carry losses forward to reduce profits in future years, Gordon explained. And if you still want exposure to the digital asset, you can “sell and rebuy immediately,” said Ryan Losi, a CPA and executive vice president of CPA firm, PIASCIK.
While crypto taxes are already complex, it’s even murkier for FTX customers. “There are different ways it can be treated, depending on the facts of the case,” Losi said. You may be able to claim a capital loss, or “bad debt deduction,” and write off what you paid for the asset. But “it should only be done when that loss is certain,” Gordon said.
With FTX’s bankruptcy case in limbo, customers may opt to file for a tax extension and wait for more details to emerge, Losi said. “It’s a question for the individual and their tax preparer,” Gordon added. “There’s not a clear way to go with it.”