Digital assets

What Happened

It has been a rough 2022 for cryptocurrency holders who had to face the collapse of luna and its associated stablecoin terraUSD, the meltdown of several digital-asset exchanges, and a brutal financial winter that cut the market value of all coins and tokens to $800 million from the January high of $2.4 trillion. With the year coming to an end, U.S. investors–most of whom are likely to be sitting on losses – have some room to optimize their tax situations and get ready for the upcoming filing season.

Anyone following crypto knows how volatile the market can be. Forbes CryptoAsset & Blockchain Advisor looks at the universe of viable crypto assets with proprietary analysis and insider crypto knowledge to guide you to the best choices.

Key Concepts

Below are some strategies and best practices you can follow before the end of the year to save on taxes and have a smoother filing experience in April.

Harvest Tax Losses

Tax-loss harvesting involves selling underwater crypto assets, realizing a tax loss and buying back the same asset to maintain your position. Considering the current state of the crypto markets, loss harvesting is a very effective tool to reduce your upcoming tax bill.

For example, Chris purchased 1 bitcoin (BTC) for $50,000 at the beginning of the year. It is now worth $20,000. Instead of continuing to hold the coin, Chris can sell it for $20,000 and buy it back to maintain his position. This sale makes the previously unrealized loss realized. Chris can use this realized loss of $30,000 ($50,000 – $20,000) to reduce his 2022 income or carry forward the benefit to future years.

Continuing with the example above, if Chris has $40,000 worth of stock gains in 2022, he can fully use the $30,000 harvested loss to shelter most of the $40,000 gain. Thanks to tax loss harvesting, he will only end up paying federal tax on $10,000 of ($40,000 – $30,000) capital gains . If Chris doesn’t have net capital gains on his other investments for 2022, out of the total $30,000 harvested loss, he can only use $3,000 to reduce his other taxable income for the year. However, the benefit is not lost. He can carry forward the remaining $27,000 ($30,000-$3,000) capital loss to future years to offset future gains.

Another thing to note is that the wash-sales rules that affect equities are not applicable to cryptocurrency because it is treated as property by the IRS. This means that you can sell your underwater positions to harvest tax losses and buy them back within a reasonable period of time (for example, within a week) at a lower price if you want to maintain the position. If you were to do this for your stock portfolio, you’d have to wait at least 30 days for the IRS to let you book the loss.

Donate Cryptocurrency

Donating cryptocurrency to charities is one of the rare situations where you can get two tax benefits at once. December is a great time to donate and lock in tax benefits for the tax year.

By donating cryptocurrency to charities:

• You get to bypass the capital gains taxes on appreciated cryptocurrency holdings

• You get a charitable-contribution deduction on Schedule A which will help reduce both crypto and non-crypto-related taxable income

The amount of deduction you get on cryptocurrency donations depends on how long you held the token. If you donate crypto that you held for more than 12 months, you get a tax deduction equivalent to the market value at the time of the donation.

If the holding period is less than 12 months, your deduction will be the lesser of your cost basis or the market value at the time of the donation.

Note that this benefit is available only if you itemize on your tax return.

Gift Cryptocurrency

Each year, the IRS allows you to gift up to $15,000 of crypto assets to an unlimited number of persons without triggering any tax or reporting obligation for any parties involved. If you haven’t used up your annual gift threshold, this is a good time to gift coins or NFTs to your loved ones.

For example, say you have 1 bitcoin (BTC) purchased at $5,000 and now it’s worth $12,000. If you were to gift this to someone, you will not have to pay capital gains taxes on $7,000 ($12,000-$5,000) worth of gains. The donee will not have to report any income either. There is no IRS reporting requirement either because the value of the gift is less than $15,000.

(If you were to cash it out and gift the dollar proceeds, you will have to pay taxes on $15,000 of capital gains)

Losses Due To Bankruptcies Of Exchanges

You might have funds stuck in BlockFi, Voyager Digital, Celsius Network, or FTX that are currently going through the bankruptcy process. Although most people already consider those funds to be lost, unfortunately, for tax purposes, you can not deduct them against 2022 income because the bankruptcy processes are still in progress.

When a case is resolved, you might be able to take a tax write-off depending on the circumstances. ( How Frozen Crypto Funds Could Generate A Tax Write-off For Investors ). It is highly recommended to consult with a tax advisor before taking deductions related to funds lost in exchange bankruptcies.

Record Keeping

If you traded cryptocurrency and NFTs during 2022, this is a good time to gather your records, connect all your wallets and exchanges to reputable crypto-tax software, and reconcile annual gains and losses. Since the majority of cryptocurrency exchanges don’t issue a Form 1099-B summarizing your annual gains and losses, it is your responsibility to accurately calculate them.

Timing Gains

It is possible that you may have some coins in the green. If this is the case, smart timing could push the tax liability into 2023. The U.S. tax system works on a calendar year. Taxes related to your finances in 2022 is due by April 15, 2023. Since we are at the end of the year, you can consider selling some of your crypto positions any time after December 31 to smartly push the tax liability to 2023.

This strategy is even more effective if your income tax bracket is going to be lower in 2023 due to a change in career, personal situation (taking a year off from work, for example, or moving to a state with no income taxes) or retirement.

Next Steps

• Consider harvesting tax losses if your crypto positions are in the red.
• Consider donating cryptocurrency to qualified charities to reduce your tax bill.
• Start gathering your records to calculate your annual gains or losses related to crypto.

Further Reading

• Will Your Crypto Trading Lead To An IRS Audit?
• The IRS Is Working On A New Tax Form To Capture Your Crypto Activity
• Large Crypto Losses May Not Become Instant Tax Write-Offs, But Here’s What You Can Do

Disclaimer: Nothing in this article is meant to constitute tax, accounting, or financial advice.

MicroStrategy MSTR , the business-software company that has a thing for bitcoin still loves the cryptocurrency even though it sold some for tax purposes last month, employing a tactic that could help other long-term fans ease the pain from the asset’s months-long slide.

As part of a flurry of late-year transactions, MicroStrategy sold about 704 bitcoins at an average price of $16,776 on December 22, the first time the company had divested any holdings of the leading cryptocurrency. But that followed purchases of about 2,395 tokens for about $17,871 each from November 1-December 21.

The company said in an SEC filing that it planned to use losses generated by the sale to diminish previous capital gains, which could result in tax benefits. It also said it turned around and bought 810 bitcoins on December 22 at about $16,485 each, meaning MicroStrategy had a net increase of about 2,501 in its bitcoin hoard since the start of November, which added to holdings of 130,000 at the end of September.

“This gives you a short-term capital loss of $770,880 before commissions, which can be used to offset both long and short capital gains generated during the year plus allow a $3,000 loss against ordinary income if there are any excess of the losses. Any excess over that can be carried over to 2023 to offset more capital gains the same way,” says Brian T. Stoner, a Los Angeles-based certified public accountant.

The strategy takes advantage of bitcoin’s status as a commodity that is not subject to the wash-sale rules for securities, under which a seller must wait 30 days to repurchase an investment in order to book the tax loss. In the case of MicroStrategy’s bitcoin portfolio, the benefit may be large.

“The refund can be substantial if MicroStrategy can match the losses to its 2021 purchases, where it paid on average $49,229 per bitcoin. Considering that they repurchased bitcoin a few days after its sale, Microstrategy probably thinks that its price will rise again in the future,” says Steven Chung, a Los Angeles-based tax lawyer.

Indeed, says Shirish Jajodia, the vice president of treasury and investor relations at MicroStrategy, “There is no change to our bitcoin strategy, which is to acquire and hold bitcoin for the long term.”

Retail cryptocurrency investors can also use this tax-harvesting strategy, and for many the $3,000 reduction against ordinary income could be significant.

“As Bitcoin BTC and crypto continue to experience global adoption, I suspect we’ll be seeing more such tax-loss harvesting strategies employed by a larger number of investors to offset capital gains at the end of any given year” says Jeffrey Blockinger, the general counsel of Quadrata, a Los Angeles-area blockchain security company.

“MicroStrategy will likely now have more cash on its balance sheet for potentially funding any number of initiatives that could include share buybacks or buying more, and now relatively cheaper, Bitcoin,” says Blockinger.

In fact, MicroStrategy already does have some more cash on its balance sheet. In the SEC filing that announced the tax sale, the company also said it had taken advantage of a September 9 agreement to sell stock to Cowen COWN & Co. and BTIG, issuing 218,575 class A shares from October 1 to December 27 at an average price of $213.16, for a total of $46.4 million. That sum is roughly equivalent to the cost of acquiring the net 2,501 bitcoins it purchased in November and December.

Whether the funds raised were specifically meant to finance bitcoin purchases is unclear as MicroStrategy declined to comment. However, the SEC filing that announced the sales agreement listed the planned use of proceeds as general corporate purposes including acquisition of the cryptocurrency.

The day that sales agreement was signed, MicroStrategy shares closed at $261.97. Since then, the stock has declined 37% to $165.06, which includes a rally of $17.71, or 14%, on Wednesday. Bitcoin is down 20%, to $16,797, since the September 9 agreement. The company was unprofitable on a net income basis for the seven quarters through Q3.

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Crypto continues to have a rocky 2023, with one of the most recent announcements being a pending lawsuit against Coinbase by the Securities and Exchange Commission. While the SEC continues to hammer on virtually every crypto-native organization or service provider, there are other issues that investors need to keep in mind. Taxes are a part of any business conversation, and rarely a fun one to discuss. Enjoyable or not, however, taxes are an important topic for any investment or business decision; crypto taxes and tax treatment continue to provide fertile ground for debate, discourse, and wide ranging conversation.

Even as the Internal Revenue Service has continuously updated guidance, issued multiple online Q&A documents, and made changes to tax forms for U.S. taxpayers, the tax situation surrounding crypto continues to be a complicated one. Straight-forward crypto transactions, such as using bitcoin (or other crypto) for transactional purposes, are well understood from a tax perspective, but that only represents a small piece of the larger puzzle. Areas that remain open to intense debate and conversation include staking, wrapped tokens, decentralized finance transactions, and non-fungible tokens.

NFTs stand apart from other cryptocurrencies due to the fact that they represent unique and different individualized assets, and that NFTs are connected to an external asset, whether it be virtual or physical in nature. With recent news that the IRS is considering changing tax treatment for NFTs, in essence to tax them all at the higher collectible tax rate versus the lower capital gains rate, investors and accounting professionals alike need to keep up to date on these issues.

Let’s take a look at a few things that practitioners should keep in mind when trying to advise clients this tax season.

The IRS is taking crypto seriously. A common, and recurring, complaint that has been leveled against the IRS and other regulatory authorities is that there is a perception that the crypto sector has not been taken seriously, or treated on the equivalent basis of other asset classes. As the IRS has issued multiple comments, revenue rulings, and other commentary, it is clear that crypto has moved from a back burner concern that only was the focus of technical experts to one that has definitively made it to the mainstream.

Setting aside the political commentary that continues to dominate the blockchain and crypto sector, the reality is that both institutions and individuals are embracing blockchain-based payments. It can take the form of crypto/bitcoin serving a payroll function, crypto being used as a medium of exchange on an everyday basis, or retail investors seeking to diversify a portfolio. Regardless of what form the implementation takes, the reality is that crypto continues to gain acceptance and adoption; the IRS and other regulatory agencies are taking note.

Crypto taxes are changing. Even though the treatment of cryptoassets from a tax perspective is relatively simple – crypto is treated as property and taxed whenever it is utilized as part of an exchange or other transaction – the fast moving nature of crypto also creates multiple situations where a blanket treatment is not applicable. NFTs have made a dramatic impact on the crypto sector, and look likely to continue to do so going forward. As crypto, even during the ongoing crypto winter that continues to place pressure on the sector, continues to become more readily accepted by individuals and institutions alike, tax compliance and reporting must also keep pace.

As cryptoassets of all kinds become more readily accessible, the fact is that accounting and tax practitioners will need to keep pace with these changes. Even if the proposed change for NFTs is altered as a result of public feedback, the fact that such proposals have been put forward conveys the message that compliance and revenue raising are priorities for the IRS.

Tax practitioners need to be proactive. Taxes are backward looking by their nature, with individuals discussing and paying taxes on events that have occurred in the past. This seems unlikely to change – after all it is impossible to tax income before it occurs – but that is no excuse for accounting and tax professionals to take a back seat in the decision making process. Crypto taxes are already a complicated and fast moving area, NFTs represent a differentiated subset of crypto in and of themselves, and changing tax rates and criteria will only further complicate the situation.

NFTs might have receded from the headlines, but the tax conversation around them is heating up.

Widely circulated reports that the U.S. Securities and Exchange Commission (SEC) is investigating $20 billion crypto exchange Coinbase are just the tip of the iceberg, according to a staffer from U.S. Senator Cynthia Lummis’ (R-Wy) office. The staffer says every U.S. crypto exchange—and the largest crypto exchange in the world, Binance—are in various stages of being investigated. There are more than 40 U.S. cryptocurrency exchanges, according to crypto data site, CoinGecko. The SEC has not responded to multiple requests for comment.

Coming in the wake of a number of SEC actions asserting the regulator’s domain over the crypto industry, and an equally strong response by the U.S Commodity Futures Trading Commission (CFTC) pushing back against what it characterizes as “regulation through enforcement,” the staffer says the SEC urgently wants to resolve its dispute with the CFTC over crypto jurisdiction. If the matter isn’t resolved internally, he says legislators would have to get involved, and that Congress is likely to side with the CFTC.

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In 2014, long before ethereum and pretty much any cryptocurrency other than bitcoin and its early copycats existed, the CFTC asserted its jurisdiction over what it then called “virtual currencies.” Then, in 2018, a Federal Court ruled that the CFTC could prosecute fraud cases involving virtual currency, according to a CFTC statement . Similarly, the SEC has multiple times asserted that bitcoin is a commodity. And in June 2018 SEC director William Hinman said in a speech that he didn’t think ethereum was a security, implying it might properly be under the CFTC’s jurisdiction.

Evidence that the situation might be changing started to emerge in June when Gary Gensler, the SEC chairman, implied that ethereum was a security when he said bitcoin was the only cryptoasset he was comfortable calling a commodity. It’s of note that while ethereum itself wasn’t included in the list of nine assets the SEC said was a security in its insider trading allegations against former Coinbase employee, his brother and his friend, the SEC specifically mentioned each of the assets were created on the ethereum blockchain.

Perhaps self-servingly, the source described the conversations between the SEC and CFTC as not particularly fruitful, arguing that the final decision about who gets what authority will likely fall in law-makers’ hands.

Yesterday, U.S. Senators Debbie Stabenow (D-MI), Chairwoman of the Senate Committee on Agriculture, Nutrition, and Forestry, and ranking member John Boozman (R-AR), introduced the Digital Commodities Consumer Protection Act of 2022 to give the CFTC new powers to regulate digital commodities. Senator Lummis herself co-sponsored with Senator Kirsten Gillibrand (D-NY), the Responsible Financial Innovation Act, a bipartisan legislative proposal for the regulation of digital assets that is even more comprehensive in scope.

Ironically, Senator Lummis’ staffer gives both bills a less than 50% chance of being passed this year. The only way either bill would pass this year is if a catastrophic black swan event, like a major U.S. exchange collapsing, could rally lawmakers, he says. The most likely crypto bill to see traction before the year’s over is the recently delayed stablecoin bill that describes how banks might be allowed to issue their own stablecoins, which the source says could be attached to the appropriations bill by the end of the year.

A senior executive at a large cryptocurrency exchange also said, on background, that based on chatter he’s hearing from members of the SEC, many U.S. cryptocurrency exchanges have likely received Wells Notices used to formally inform companies when an action is about to be brought against them, and that most are under investigation. Binance.US de-listed one of the assets listed by the SEC earlier this week.

The executive said these instances are separate from standard procedure the SEC regularly conducts—for example—asking exchanges if they’ve had any communication with the team that created a newly listed asset, are in touch with anyone raising money for the newly listed asset, or if the team ever made representations about how the token might accrue value.

The executive further says the SEC hasn’t historically asked about forks of bitcoin like litecoin, but based on recent comments to the House Appropriations Committee that bitcoin “may” be a commodity, that could change soon.