Tax Planning Can Help Offset Losses for Crypto Traders

When filing taxes, reporting on cryptocurrencies can help investors offset their losses. The year 2022 was a hard one for the crypto fraternity. Recently, an Immunefi report found that in 2022 crypto investors lost $3.9 billion. Colossal losses such as these usually alarm investors, though a silver lining may be in the offing for those investors who report crypto as part of their tax returns.

Lisa Greene-Lewis, a TurboTax accountant, said that while in 2021 crypto investors had huge gains, the tides changed in 2022. “TurboTax is willing to help investors bear their loss,” she said. Harvesting of tax loss is critical to consider if one wants to save money during the filing of tax returns.

It is important for young investors entering the crypto market to be aware of how critical tax harvesting is. While the tax loss selling for 2022 expired on Dec. 30, 2022, it’s still possible for crypto investors to follow up on this as the losses roll forward, making this an operative tax strategy yet. One can also donate to charity to reduce taxable income, which can be an excellent strategy during a bull market season.

Individual Retirement Accounts (IRAs) are yet another route crypto investors can leverage to reduce their taxable income. Recently, a controversy arose around U.S. citizens buying digital assets using their IRA funds. Some improvement has been noted in crypto-focused IRA options, said Steven Lubka, Swan Global Wealth vice president.

Things to consider

Inasmuch as there seems to be some benefits associated with posting cryptocurrency during tax returns filing, many crypto investors lack awareness. CoinLedger, a tax software company, discovered that 31% of investors surveyed never report crypto on their taxes because they don’t make a profit on crypto. David Kemmerer, CEO of CoinLedger, said the Internal Revenue Service (IRS) needs to educate investors about taxes so they can understand how to go about their crypto tax reporting.

Pat White, the CEO of Bitwave, explained that in the future, crypto investors need to be ready for the IRS to impose wash trading rules. White also noted that there are open options for tax-loss harvesting in such a scenario. He also remarked that entities running Ethereum 2.0 node are receiving rewards on a daily basis. Users need to consider if these rewards would be acknowledged as income on tax returns. This will be crucial after the Shanghai upgrade to allow for the staked Ether withdrawal.

It looks like blockchain and crypto industry players such as Marathon Digital Holdings Inc. (NASDAQ: MARA) may need to conduct some public awareness campaigns around how digital holdings can be looked at for tax purposes, though it is the responsibility of individuals to acquaint themselves with all applicable tax laws.

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