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Crypto firm BlockFi filed for Chapter 11 bankruptcy on Monday, two weeks after crypto exchange FTX collapsed, further complicating taxes for investors during a difficult year.
BlockFi, which offers an exchange and interest-bearing custodian for cryptocurrency, has halted customers’ withdrawals before filing for bankruptcy, acknowledging that the company has “significant exposure” to FTX.
However, “all these awards are still taxable,” said Andrew Gordon, a tax attorney, certified public accountant and president of Gordon Law Group, although investors may not have access to their earnings at this time.
BlockFi officials did not immediately respond to CNBC’s request for comment.
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Why might crypto investors have a tax bill?
Despite recent losses, “early year gains are still on record,” Gordon said.
Typically, crypto trading is more active when the market is rising and then you are more likely to make a profit, he said.
However, depending on when you buy and sell assets, it’s also possible to make a profit even when the market drops.
The IRS defines cryptocurrency as property for tax purposes, and you must pay taxes on the difference between the purchase and sale price.
While buying a digital currency is not a taxable event, you may be required to pay taxes by cashing in assets, trading in another coin, using it to pay for goods and services, getting paid for business, and more.
How do you cut your crypto tax bill?
If you’re sitting on crypto losses, there may be a beacon of hope: a chance to recoup 2022 gains or move losses forward to reduce profits in years to come, Gordon explained.
The strategy, known as tax loss harvesting, can apply to other assets such as digital currency earnings or year-end mutual fund payments. After deducting investment gains, you can use losses of up to $3,000 per year to offset regular income.
If you still want exposure to the digital asset, you can “sell and repurchase right away,” said Ryan Losi, vice president of PIASCIK, a CPA and CPA firm.
Currently, the so-called “wash sale rule” that prevents investors from buying a “substantially identical” asset 30 days before or after the sale does not apply to cryptocurrency, he said.
How FTX collapse and BlockFi bankruptcy could affect your taxes
While crypto taxes are already complex, they are even more complex for FTX and BlockFi customers.
“There are different ways it can be treated, depending on the facts of the case,” Losi said. Said.
You can claim a capital loss or “bad debt relief” and write off the amount you paid for the asset. However, Gordon said that “it should only be done when this loss is certain”.
Losi said that as both bankruptcy cases are in limbo, customers may choose to apply for a tax extension and wait for more details to emerge.
“Just like FTX, we recommend taking a ‘wait and see approach’ because the IRS requires that the loss be final and complete,” Gordon said. “We don’t know that particularly with BlockFi at these early stages.”