Crypto Holders Face Tricky Tax Situations as US Taxes Due Next Week – Here's What You Need to Know
Crypto investors in the US are finding themselves in tricky tax situations, with many of them still struggling with losses from last year’s market downturn and the many bankruptcies that occurred.
For this year’s taxes, the Internal Revenue Service (IRS) has made adjustments to its income tax form to be more explicit about what counts as crypto holdings.
Filing instructions now use the term “digital assets” instead of “virtual currency” to clarify that assets like NFTs also need to be reported, the latest edition of the Bloomberg Crypto newsletter said.
The change reportedly came after taxpayers were unsure if NFTs were required to be reported.
In addition to the new terms used, the 2022 tax form also goes into further detail on one crypto-related question that asks whether the crypto was received as a "reward, award, or compensation."
The change in that question is part of the 2021 infrastructure bill, which tightened crypto reporting requirements further, the newsletter said.
Taxes for 2022 are due in the US already next week.
Companies may start to report client transactions
Although requirements have already been tightened, there is still more to come in the near future.
Among other things, the US Treasury Department is expected to release new rules for crypto service providers, requiring them to turn over records of client transactions to the IRS.
The rules were supposed to go into effect in January, but have been postponed until the text can be finalized.
Tax loss harvesting
Like every year, crypto investors who are sitting on losses can use a popular technique known as tax loss harvesting to deduct up to $3,000 in losses against their income each year.
The technique involves selling assets at a loss before the end of the tax year, and then buying back the same asset shortly after in order to realize the loss.
Still, some investors may have even bigger problems to deal with given the many bankruptcies seen among crypto companies last year. Most notable among these, perhaps, was the FTX collapse, which still has billions of dollars in investor money trapped.
Crypto owners who have their holdings trapped in bankrupt companies are obviously unable to sell their assets to realize any losses.
And to make matters worse, some of these crypto owners may still be liable to pay taxes on interest earned on their crypto in 2022, for instance through interest-earning crypto accounts such as those offered by now-bankrupt crypto lender Celsius.