Collapse of cryptocurrency market and the reporting of losses on income taxes
Turkey leftovers, title clinching victories and tip-offs cause another "T-word" to surface — TAXES! Since the "tax season" is an inevitable element of life, TAX TALK returns to provide (hopefully) sage advice that may save you some dollars while causing you to grin (at times), groan or "go with — or without — the cash flow."
The cryptocurrency television ads and other promotions put me a in a FOMO (fear of missing out) mode. So, I bought bitcoin earlier this year. Right now, the losses are about $7,000. Can you provide income tax advice to lessen the impact of these losses?
— SCC, email
Our grandparents were right when they told us something that was too good to be true probably was not going to happen. The cryptocurrency industry has taken major publicity and dollar body blows throughout 2022. When FTX declared bankruptcy a few weeks ago, the crypto currency market collapsed.
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The Internal Revenue Service treats cryptocurrency as a capital asset. That's good news when gains are reported because long-term capital gains may qualify for a preferential tax rate. Generally, capital losses can only offset capital gains during the year. If you have any "winners" in your stock portfolio, we recommend you start to generate capital gains between now and the end of 2022.
You've got $7,000 of losses that can offset the capital gains. If there are no or not enough capital gain-generating assets, there is some relief provided by the Internal Revenue Code. Namely, the rule that capital losses are deductible only against capital gains provides a bit of "wiggle room" for individual taxpayers who are eligible for an annual deduction of up to $3,000 of capital losses that exceed capital gains. If no capital gains can be generated between now and Dec. 31, you can offset $3,000 of ordinary income on your 2022 tax return. The remaining $4,000 is eligible for carryover into 2023 where it can offset capital gains or another $3,000 of other income. Best case scenario for you — sell capital gain assets in your portfolio before year's end (or the Gator Bowl kick-off). Up to $7,000 of those gains will drop your 2022 capital activity to $0 because the cryptocurrency losses will offset each capital gain dollar. Worst case scenario — no capital gains mean a $3,000 write-off in 2022 with a $4,000 carry forward to offset future capital gains and/or $3,000 of ordinary income in 2023.
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The above advice about cryptocurrency losses also applies to other individual capital loss situations such as the sale of stock and/or other property held as an investment. Put differently, once the capital losses have offset capital gains, up to $3,000/year is available to decrease an individual's taxable income.
Ken & Klee's income tax bulletin board
Since 2015, the IRS, state tax administrators and the tax software and tax professional community have worked together to improve defenses and protect people from tax-related identify theft. The IRS specifically is warning taxpayers of a recent increase in IRS-themed texting scams aimed at access to personal and financial information. During 2022, the IRS identified and reported thousands of fraudulent domains tied to multiple MMS/SMS/text scams, known as "smishing," aimed at taxpayers. "Smishing" efforts target mobile phone users and the scam messages often look like they're coming from the IRS. Lures include fake coronavirus relief, tax credits or help setting up an IRS online account. Recipients of these IRS-related scams should report them to phishing@irs.gov and not respond to these devious tactics.
While we're at it, here is some non-income tax advice from the IRS. NEVER buy anything from online sellers that accept payment only by gift cards, money transfers through companies like Western Union or MoneyGram or cryptocurrency. These payments are nearly impossible to trace and reverse.
Rick Klee served as the tax director at the University of Notre Dame from 1998 through August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact him at rklee@nd.edu.
Ken Milani is a professor of accountancy at Notre Dame where he served as the faculty coordinator of the Notre Dame Tax Assistance Program. Contact him at milani.1@nd.edu. E-mail questions to either.
This article originally appeared on South Bend Tribune: Tax Talk: Answering 2022 tax questions from readers.
