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Crypto Crash; Investors May Need to Act Fast to Reduce Tax Bill

It has been a bad week for cryptocurrencies following the collapse of the offshore exchange FTX. The recent decline in bitcoin in 2022 must-have caused many crypto investors to give up on digital assets, at least for the time being. However, that would be a mistake. These tax issues will be important for investors to address before the end of the year, and the IRS hasn’t lost interest in cryptocurrencies.

Losses On Crypto Could Turn Into A Gain

There is a silver lining for crypto investors whose holdings are in taxable accounts rather than tax-sheltered accounts, such as IRAs. A crypto investor can use a capital loss on crypto to offset future capital gains on winners if they sell it and book a capital loss on it. Investing in stocks, real estate, or other assets can result in these gains (or losses) as well. An investor with capital losses who do not have capital gains can use the losses to offset up to $3,000 of ordinary income per year, such as wages,  and these losses don’t expire.

New IRS Reporting

Crypto brokers must file 1099s with the IRS if their customers’ sale proceeds are held in tax-exempt accounts under the Infrastructure Investment and Jobs Act of 2021. Similar requirements apply to brokerage firms reporting investors’ stock sales.

By making the change, crypto investors will have to pay more attention to their cavalier–and sometimes criminal–tax avoidance practices. Since Congress acted, few crypto transactions have been reported to the IRS by third parties, such as exchanges, and many investors have ignored crypto tax rules. According to a recent court filing, only about 100,000 tax returns reported crypto transactions in 2019. According to research, about 20% of American adults have bought, traded, or used cryptocurrencies.

Accordingly, the first tax forms will be sent to taxpayers and the IRS in early 2024 after the new law takes effect on Jan. 1, 2023. The Treasury Department has not yet issued regulations defining thorny issues like who is a crypto broker, which may delay the date. Crypto firms also need to update software.

Wrap Up

The law and regulations inside the crypto space seem to be evolving and changing every day. With the recent crash, investors should be keeping up with them regularly because the IRS will stay as diligent as they can to make sure they the proper taxes. If you need any assistance in the crypto space it could be a good idea to contact a trusted financial advisor.

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