Tax Day Brings Some Extra Wrinkles for Crypto Investors

In this edition of the Bloomberg Crypto newsletter, Bloomberg Tax’s Erin Slowey talks crypto and taxes ahead of filing day in the US: 

Taxing times

US taxes are due next week, and the frenzy to file brings extra wrinkles and some potential tricky situations for crypto holders — many of whom were hurt by last year’s price slump or entangled in the series of blowups that occurred. 

First off, filers will notice that the Internal Revenue Service made adjustments to its 1040 income tax form to be more explicit about what counts as crypto holdings. Filing instructions include new wording for these investments, calling them “digital assets” instead of “virtual currency” — a way of clarifying that these include nonfungible tokens, or NFTs. Prior to the update, taxpayers did not know if they were required to report NFTs. Now they know.

The 2022 tax form also expands a question related to crypto, requiring taxpayers to specify whether they received it as a “reward, award or compensation,” alerting investors what to track more closely. The change stems from the 2021 infrastructure law, part of which was aimed at tightening cryptocurrency reporting requirements. 

Crypto investors who exited digital-asset investments at a loss last year may not be happy about it — but they can put those losses to work by “harvesting” them. In tax-loss harvesting, an investor sells an asset at a loss to reduce their overall tax liability. Investors can deduct up to $3,000 of losses against their income each year.

Investors in defunct exchanges like FTX face a different series of challenges: Most investments will be frozen and in limbo until bankruptcies are finalized. Some taxpayers, like those who lent assets to bankrupt Celsius Network, are still required to pay tax on the interest accrued in 2022.

Going forward, the Treasury Department is expected any day now to release highly-anticipated proposed rules for crypto brokers that would force them to turn over records of client transactions to the IRS.

The rules are meant to address some reporting requirements stemming from the 2021 infrastructure law, part of which was aimed at tightening cryptocurrency reporting requirements. These were supposed to go into effect in January but were punted until after the final rules are released. And while they aren’t expected to impact the current filing season, they are something to be aware of, for future reference.

With crypto still a relatively new investment, prone to big gains and losses, it's not clear how many investors are ready to come clean about their holdings. A recent study by a Swedish tech company found that, globally, just 0.53% of cryptocurrency investors declared their cryptocurrency activity to their local tax authorities in 2022. 

Diehard crypto investors know how to avoid the taxman altogether: Just keep hodl-ing. 

Charting it out

Hearing them out

What we’re reading (and writing)

• Crypto Donations to Charity Falter on Fuzzy Tax Rules, Value Dips
• Ethereum Network Completes Key Software Upgrade Without a Hitch
• The U.S. Cracked a $3.4 Billion Crypto Heist — and Bitcoin’s Anonymity (Wall Street Journal)
• France’s ‘Startup Nation’ Becomes a Haven for Crypto
• Bitcoin’s Resurgence Spurs Fresh Push to Launch Leveraged ETFs
• Twitter Partners With eToro to Let Users Trade Stocks, Crypto as Musk Pushes App Into Finance (CNBC)
• FTX Is Considering Using Creditor Money to Restart Crypto Exchange

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— With assistance by Emily Nicolle