Tax strategies allow crypto investors to offset losses

2022 was tough for the crypto market. A recent report published by security services platform Immunefi found that the crypto industry lost a total of $3.9 billion in 2022. 

Detrimental losses such as these are often concerning for crypto investors, yet there may be a silver lining behind decreasing assets for investors reporting crypto on their taxes.

Lisa Greene-Lewis, a certified public accountant at TurboTax, told Cointelegraph that while crypto investors made huge gains in 2021, this changed drastically in 2022. “We have seen a crypto winter occur, and TurboTax wants to help investors cope with their losses,” she said. According to Greene-Lewis, tax-loss harvesting is the most important notion to keep in mind when it comes to saving money when filing taxes. She said:

“With crypto, you can offset gains with losses. Any leftover losses can be offset up to $3,000 against ordinary income like wages. Losses exceeding $3,000 can be carried forward to the next tax year.”

Greene-Lewis explained that as new, young investors enter the crypto market, awareness around tax-loss harvesting is becoming more critical. According to a Pew Research Center survey cited in TurboTax’s latest tax trend report, 16% of Americans have invested in, traded or used cryptocurrency. Individuals between the ages of 25 and 34 are more likely to have cryptocurrency sales transactions than any other age group. “Many of these individuals are unaware of tax-loss harvesting,” Greene-Lewis said.

While the last day for tax-loss selling for 2022 passed on Dec. 30, Greene-Lewis reiterated that crypto investors can still perform this action since those losses roll forward. 

Steven Lubka, vice president of Swan Global Wealth — Swan Bitcoin’s private client services arm — further told Cointelegraph that tax-loss harvesting is a great option for Bitcoin (BTC) investors.

“This is probably the most actionable tax strategy. Swan Global Wealth works with private clients to provide valuable market insights, yet most individuals did not know that tax-loss harvesting was an option,” he said.

Recent: What crypto hodlers should keep in mind as tax season approaches

Lubka further pointed out that tax-loss harvesting is beneficial because there is currently no “wash sale rule” applied to crypto, which would prevent the tax break if an investor bought that same asset 30 calendar days before or after the sale. “This means that crypto investors can sell their assets and then instantly buy those back while locking in the loss on their taxes.” While this is certainly advantageous, Lubka believes that this process will likely change in the near future.

Donating to charity is another way for crypto investors to reduce their taxable income, which can be a good strategy during a bull market. Alex Wilson, co-founder of The Giving Block — a crypto donation platform — told Cointelegraph that donating cryptocurrency is tax efficient because it allows investors to avoid capital gains tax. He said:

“If an investor bought Bitcoin at $1 and sold it at current market prices, that would normally be taxed. But if you donate the Bitcoin to a nonprofit, it becomes tax deductible. These deductions are even higher when donated to a 501(c)(3) charity.”

Wilson shared that The Giving Block has seen an increasing number of crypto donations over the past year, especially as investors become more aware of the benefits. “I expect this year to be big for donations because crypto is already on the rise,” he said, adding that nonfungible token (NFT) philanthropy is gaining momentum. “The Giving Block has seen almost 30% of its donations coming from NFTs.” According to Wilson, NFT donations function the same as crypto donations.

17.75037 ETH, $28,455.64~ to @FeedingAmerica

Approximately 320,000 meals provided so far.

https://t.co/yp8grV4pl5

— @jackbutcher (@jackbutcher) January 29, 2023

Individual retirement accounts, or IRAs, are yet another way for crypto investors to reduce their taxable income. Similar to a 401(k), assets held in traditional IRAs will grow tax-deferred, meaning investors won’t have to pay income tax until assets are taken out.

While there has recently been controversy around United State citizens purchasing digital assets using funds in IRAs, Lubka noted that crypto-focused IRA options are improving.

For instance, he explained that in the coming weeks, Swan Bitcoin will launch a low-fee Bitcoin IRA accessible to all the platform’s users. “Traditional IRAs charge exorbitant fees. The only yearly fee with Swan’s Bitcoin IRA is .25%,” he said. Such a product is likely to gain traction with crypto investors, with a Charles Schwab survey recently finding that many zoomers and millennials would like to have crypto as part of their 401(k) retirement plans.

Things to consider moving forward

Although there appear to be several benefits associated with…