Crypto firm BlockFi on Monday filed for Chapter 11 bankruptcy, two weeks after the collapse of crypto exchange FTX, further complicating taxes for investors during a difficult year.
BlockFi, which offers an exchange and an interest-bearing custodial service for cryptocurrency, halted customer withdrawals before the bankruptcy filing, admitting the firm had “significant exposure” to FTX.
However, “all of those rewards are still taxable,” even though investors currently can’t access their earnings, said Andrew Gordon, a tax attorney, certified public accountant and president of Gordon Law Group.
Officials at BlockFi did not immediately respond to CNBC’s request for comment.
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Why crypto investors may have a tax bill
Despite recent losses, “gains from earlier in the year are still on the books,” Gordon said.
Typically, crypto trading is more active when the market is going up, and that’s when you are more likely to incur gains, he said.
However, it’s also possible to have profits even when the market drops, depending on when you bought and sold the assets.
The IRS defines cryptocurrency as property for tax purposes, and you must pay levies on the difference between the purchase and sales price.
While buying digital currency isn’t a taxable event, you may owe levies by converting assets to cash, trading for another coin, using it to pay for goods and services, receiving payment for work and more.
How to slash your crypto tax bill
Since reaching an all-time high of more than $68,000 in November 2021, the price of bitcoin has dropped by more than three-quarters, approaching $16,000 as of Nov. 28.
If you’re sitting on crypto losses, there may be a silver lining: the chance to offset 2022 gains or carry losses forward to reduce profits in future years, Gordon explained.
The strategy, known as tax-loss harvesting, may apply to digital currency gains, or other assets, such as year-end mutual fund payouts. After reducing investment gains, you can use up to $3,000 of losses per year to offset regular income.
And if you still want exposure to the digital asset, you can “sell and rebuy immediately,” said Ryan Losi, a CPA and executive vice president of CPA firm, PIASCIK.
Currently, the so-called “wash sale rule” — which blocks investors from buying a “substantially identical” asset 30 days before or after the sale — doesn’t apply to cryptocurrency, he said.
How the FTX collapse and BlockFi bankruptcy may affect your taxes
While crypto taxes are already complex, it’s even murkier for FTX and BlockFi customers.
“There are different ways it can be treated, depending on the facts of the case,” Losi said.
You may be able to claim a capital loss, or “bad debt deduction,” and write off what you paid for the asset. But “it should only be done when that loss is certain,” Gordon said.
With both bankruptcy cases in limbo, customers may opt to file for a tax extension and wait for more details to emerge, Losi said.
“Just like FTX we would suggest taking the ‘wait and see approach’ because the IRS requires that the loss is certain and in full,” Gordon said. “We don’t know that, especially at these early stages with BlockFi.”