Target on crypto investors back continues to grow this tax season

Crypto investors have been warned to ensure they secure all relevant tax information this season as the IRS and the Security and Exchange Commission (SEC) are paying extra attention to digital assets. In an interview with Yahoo Finance LIVE, Terrence Yang, the Managing Director of Swan Bitcoin, stated that “crypto does have a target on its back.” He further advised investors to collect documentation on sales and crypto investments that went to zero, as many of them did last year during the crypto winter.

Last year’s crypto winter saw many investors lose much of their cryptocurrency investments as the market plunged more than 60% since the November 2021 highs, resulting in a decimation of over $2 trillion market value. Although most people paid hefty bills for capital gains in 2021, many were surprised to learn that capital losses could be limited on tax returns. To alleviate the pain of crypto losses and limited tax benefits, Yang recommended hiring an accountant and giving them enough time to “think of tax deductions and credits.” He also suggested that investors make “lemonade out of lemon” by harvesting Bitcoin capital losses.

According to Yang, Bitcoin investors can harvest their losses for the future. This means that taxpayers who generated unrealized losses in Bitcoin can sell their Bitcoins and then rebuy them, a process that creates a capital loss on their returns. Although the IRS has rules and limitations on capital loss usage, any remaining capital losses can be rolled forward to other tax years.

“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,” said Yang. “You could sell immediately, rebuy and lock in that tax benefit by realizing your capital loss.”

However, this benefit only applies to Bitcoin, not most other cryptocurrencies. Bitcoin is currently regulated as a commodity, while many other cryptocurrencies are generally classified as securities under the SEC that are subject to the wash sales rule.

“In the past, I would have said crypto (along with Bitcoin),” said Yang, “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.”

Regardless of what digital asset holders do with their virtual coins, Yang reminded investors that for this tax season, “your goal should be to pay the correct amount of taxes to avoid penalties, take advantage of tax benefits, and reduce your audit risk.”