Tax strategies allow crypto investors to offset losses

2022 was tough for the crypto market. A recent report published by security services platform Immunefi found that the crypto industry will lose a total of $3.9 billion in 2022.

Harmful losses like these are often worrisome for crypto investors, but it can still be a bottom line for reduced assets for investors who report crypto on their taxes.

Lisa Greene-Lewis, a Certified Public Accountant at TurboTax, told Cointelegraph that while crypto investors made big gains in 2021, this changed drastically in 2022. “We’ve seen a crypto winter emerge, and TurboTax wants to help investors deal with their losses,” she said. According to Greene-Lewis, tax loss harvesting is the most important thought to keep in mind when it comes to saving money when filing taxes. She said:

“With crypto, you can offset gains against losses. Any remaining losses can be offset up to $3,000 against ordinary income as wages. Losses over $3,000 can be carried over to the next tax year.”

Greene-Lewis explained that as new, young investors enter the crypto market, awareness of tax loss harvesting becomes more critical. According to a Pew Research Center survey cited in TurboTax’s latest tax trends report, 16% of Americans have invested in, traded or used cryptocurrency. People 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 to sell tax losses for 2022 passed on December 30, Greene-Lewis reiterated that crypto investors can still take this action since those losses are rolling forward.

Steven Lubka, vice president of Swan Global Wealth – Swan Bitcoin’s private client services arm – further told Cointelegraph that tax loss harvesting is a great option for Bitcoin (BTC) investors.

“This is probably the most actionable tax strategy. Swan Global Wealth works with private clients to provide valuable market insights, but most individuals did not know that tax loss harvesting was an option,” he said.

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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 the same asset 30 calendar days before or after the sale. “This means crypto investors can sell their assets and then immediately buy them back while locking in the loss on the tax.” While this is certainly beneficial, Lubka believes that this process is likely to 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, it would normally be taxed. But if you donate Bitcoin to a non-profit organization, 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 in the past year, especially as investors become more aware of its benefits. “I expect this year to be big for donations because crypto is already on the rise,” he said, adding that non-fungible token (NFT) philanthropy is gaining momentum. “The Giving Block has seen nearly 30% of its donations come from NFTs.” According to Wilson, NFT donations work the same way as crypto donations.

Individual retirement accounts, or IRAs, are yet another way for crypto investors to reduce their taxable income. Like a 401(k), assets held in traditional IRAs grow deferred, meaning investors don’t have to pay income taxes until assets are withdrawn.

While there has been recent controversy surrounding US citizens purchasing digital assets using funds in IRAs, Lubka noted that crypto-focused IRA options are improving.

For example, he explained that in the coming weeks, Swan Bitcoin will launch a low-cost Bitcoin IRA available to all of the platform’s users. “Traditional IRAs charge exorbitant fees. The only annual fee with Swan’s Bitcoin IRA is 0.25%,” he said. Such a product would likely gain traction among crypto investors, with a Charles Schwab survey recently finding that many Zoomers and millennials want 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 tax returns, there is still a lack of awareness among many crypto investors. To put this into 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, while half did not because they did t make money and 18% without knowing that 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 example, he pointed out that it is important for crypto holders to understand how the 2021 infrastructure bill could affect the crypto tax reporting landscape.

According to CoinLedger’s 2023 report, the 2021 infrastructure bill will likely require “cryptocurrency brokers” to send 1099-Bs — a specific type of 1099 that reports capital gains and losses from securities or real estate — to the IRS for the 2023 tax year. As of now, reporting rules have of cryptotax detailing such procedures has been delayed because the IRS still needs to develop the definition of a “cryptobroker”.

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Pat White, CEO of Bitwave – a crypto tax, accounting and compliance platform – further told Cointelegraph that crypto investors should be concerned that the IRS may impose rules on wash trading in the future. However, he noted that there are still opportunities for tax-loss harvesting in the event of this scenario. “Investors can find ways to exit their coin positions into different assets. For example, Bitcoin can go into wrapped Bitcoin, which can satisfy wash trading rules, but will also reap a loss,” he explained.

White further noted that people running an Ethereum 2.0 node technically receive rewards daily. As such, he noted that these users will need to consider whether or not rewards will be monetized in 2022. This will become critical after the Shanghai upgrade that allows the withdrawal of staked Ether (ETH). He said:

“The Shanghai fork will eventually fall and people will be able to withdraw rewards. If you report your taxes correctly, you will be happy to account for this as income. However, users may be able to make beneficial tax decisions depending on when they want to recognize these rewards.”

This article does not contain investment advice or tax report recommendations. All investment and trading moves involve risk and readers should conduct their own research when making a decision.