A Bitcoin executive is warning crypto-investors that they need to make sure they keep all their relevant tax information this year, as the IRS and the Securities and Exchange Commission (SEC) will likely be targeting crypto investors.
Swan Bitcoin managing director Terrence Yang said in an interview with Yahoo Finance, “Given that crypto does have a target on its back, make sure you collect documentation on sales and in crypto investments that went to zero, as many of them did last year when the bubble burst.”
The warning comes on the heels of a brutal year for crypto, after investors lost much of their investments when the market plunged over 60% from November 2021’s highs, and evaporated more than $2 trillion in market value. Adding insult to injury, many investors are finding out after paying hefty capital gains taxes in 2021, that capital losses can be limited on tax returns.
Yang recommends that if investors want to avoid headaches, they hire an accountant, and make sure they have time to “think of tax deductions and credits.” He also suggested investors use their bitcoin losses to make “lemonade out of lemons.”
To use the losses, he recommends harvesting them by selling and rebuying the bitcoin, rendering the unrealized losses usable. That will produce a capital loss on their returns.
Although the use of capital losses is subject to IRS rules and regulations, he notes remaining capital losses can be rolled forward to future tax years.
He explained, “A lot of us saw… unrealized losses in our Bitcoin exposure because many of us bought during the bull market, during the hype in 2021. You could sell immediately, rebuy and lock in that tax benefit by realizing your capital loss.”
However he notes, this does not apply to the majority of cryptocurrencies outside of bitcoin. It only applies to bitcoin because it is presently regulated as a commodity, while other cryptocurrencies are regulated as securities, subject to the SEC’s wash-sale rule.
Yang said, “In the past I would have said crypto [along with Bitcoin], but given that the SEC and the IRS are taking a new and more aggressive look at and considering them securities, you actually can’t rebuy crypto immediately because you would violate the SEC’s 30 day wash sale rule.”
However whatever path you choose, Yang said, “your goal should be to pay the correct amount of taxes to avoid penalties, take advantage of tax benefits, and reduce your audit risk.”
