If you lost money in cryptocurrency this year, there is good news. You can claim that loss on your taxes.
This year has been a period of massive losses, with the most popular currency, Bitcoin, trading at over $68,000 in November, crashing to $22,900 this month.
The bear market in crypto erased $2 trillion in market capitalization and led to several bankruptcies among crypto firms such as Celsius, Voyager Digital, and Three Arrows Capital, among others.
However, you can claim crypto losses and offset gains in your portfolio, Philadelphia-area accounting experts say.
Trading generates gains or losses every time you buy, sell or even exchange virtual currencies.
That’s because the Internal Revenue Service treats crypto as property, just like stocks or real estate, according to tax expert Elisabeth Felten, assistant professor of business at DeSales University.
Just like stocks, crypto sales and exchanges are reported on IRS Forms 8949 and Schedule D, and are subject to the same limits, said Michael Gillen, head of tax accounting at Duane Morris in Philadelphia. That is, taxpayers are limited to a capital loss of $3,000, which you can use to offset other income, and losses greater than $3,000 can be carried forward indefinitely and used to offset income on future tax returns.
More good news for crypto investors: there is a loophole around the so-called “wash sale” rule.
The IRS prevents investors from selling stocks at a loss and immediately buying back the stock within 30 days. It’s called the “wash sale” rule.
But for now, “no such rule applies to crypto, as the IRS classifies crypto as property and not a security,” notes EisnerAmper accountant Brian McFarlane in a blog post.
That means “an investor can do what’s called ‘tax-loss harvesting’ – sell their position in cryptocurrencies for a loss, and then buy back right away,” Felten explained.
This current loophole for crypto investors was supposed to end if the Build Back Better Act passed the US Senate – but the legislation has stalled and the loophole remains.
Crypto investor and cheerleader Anthony Scaramucci, who became a household name during his brief tenure as President Donald Trump’s communications director, has grown humble.
The SkyBridge Capital founder acknowledged in a recent CNBC interview that his concentration in crypto was a short-term “mistake.” Although he said he still thinks of crypto as a long-term winner: “I want to measure the Bitcoin investment over a four-year interval.”
Investors with SkyBridge are not happy. Scaramucci told DealBook on Wednesday that investors were trying to withdraw up to $890 million from SkyBridge’s flagship fund, and Bloomberg reported two days earlier that SkyBridge had suspended investor withdrawals from another of its funds.
“We had a big position in Bitcoin,” Scaramucci told CNBC, explaining that his firm bought Bitcoin when it was worth around $18,000, before its value went up to around $69,000 and then returned to $22,000. “You take money in at the top … and money goes at the bottom, so I wish people would recognize that and keep calm … if we went from $18,000 to $22,000 everyone would be happy right now, but it didn’t go that way.”
Who Regulates Cryptocurrencies in the US? At this point, it’s a turf war.
Agencies are still carving out territory over which agency will oversee crypto, and that has left an enforcement vacuum and investors fending for themselves. That’s despite big firms like Fidelity starting to let investors with 401(k) retirement accounts buy Bitcoin.
“Every time there’s a crash, like now or in 2008, investors ask, ‘Why aren’t regulators doing more?'” said Wharton professor Kevin Werbach. He testified before Congress this year on “Demystifying Crypto: Digital Assets and the Role of Government” about the need for smart regulation of this new asset class.
Securities lawyer William “Bill” Singer argues that agencies like the Securities and Exchange Commission must act aggressively — and soon.
“Those who are victims will see it as too little, too late,” Singer said. “While the SEC has issued press releases on new rules and initiatives, a lot of time has been wasted.”
At some point, regulators will want to know “whether investors were warned about the very problems that have now arisen and have hurt their investment,” said Singer, publisher of the BrokeAndBroker blog. “The same people who are now urging caution and patience certainly didn’t mention any of those words when they made the promise of crypto.”
The crypto industry “spends more money lobbying Washington than the defense industry” to influence which agency should regulate, said Hilary Allen, a law professor at American University. “The timber war is really heating up.”
