Some crypto currencies lost a lot of their value in 2022 and 2023 while a smaller number have recovered some losses in 2023. This update is a review on how to handle both gains and losses on your tax returns and also discusses a couple of new IRS announcements regarding crypto.
First, some who are new to crypto may not realize that in order to claim a loss, you have to actually sell the currency. Say you had 50 coins in a particular currency worth $10,000 at the beginning of the year which dropped to $2000 in value by year end. To claim that $8000 loss, you would have to have sold all 50 coins in 2023. To claim half the losses, you would have had to sell half of the coins assuming all were of equal value. As an example, CCM 202302011 (https://freemanlaw.com/irs-ccms-on-crypto-donations-and-crypto-losses) discusses a currency that was purchased at $1 per unit that had declined in value to less than 1 cent per unit. The claimed loss on the taxpayer’s return was not allowed because the owner of the coin had not disposed of it and was not worthless because it still had value.
Of course, just like stocks, you can take advantage of losses to offset gains. ‘Harvesting losses’ is a valid strategy to reduce taxes whether we are talking about stocks, mutual funds or cryptocurrencies.
It should be remembered though that capital losses are limited to a net of $3000 per year. If you have $10,000 in losses and $4000 in gains, your net is a loss of $6000. However, you’re only allowed to deduct $3000 of that loss, the rest is carried over to a future year. If you had $30,000 in net losses, you would still only be able to deduct $3000. The remaining $27,000 would carry over to be netted against gains in future years.
A bit of a different animal is staking income. Here you lock up some of your currency to help in running the block chain and maintaining security. Like interest on a checking account, you receive partial coins while your coins are being used. This income is immediately taxable at the FMV of the rewards as received. The IRS reported their views on this in Revenue Ruling 2023-14.
Another IRS ruling in 2023 was in regards to crypto donated to charity. If a donation of crypto in excess of $5000 is made to a charity, a qualified appraisal is required in order to obtain the charitable deduction. See CCM 202302012. Relying on the value reported by the exchange instead of a qualified appraiser could negate the reasonable cause exception when requesting a penalty waiver.
Finally, due to reporting requirements for crypto transactions, we generally require that the crypto transactions be reported to us on Form 8949 if there are more than about 25 transactions in a given year. This is done by utilizing the services of companies like CoinTracker or ZenLedger. We can help you get setup with such companies if we are preparing your taxes and you have crypto investments.
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