As a financial advisor, it’s becoming harder and harder to ignore the crypto markets, which have been grabbing headlines in major financial media outlets all year – for better or worse.
Coming off euphoric highs from the year before, the crypto market has endured an environment of tightening monetary policy, which led to sell-offs, implosions of new projects like TerraLuna, bankruptcies of CeFi companies like Celsius and Voyager Digital and a climactic downfall of the FTX exchange.
With all that in mind, advisors need to be prepared to answer their clients questions on how to prepare for taxes on crypto this year.
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It’s no secret that 2022 has been a difficult year for global markets. The US Stock Market has fallen over 15%, bond markets have fallen over 20% and crypto markets have fallen over 50% from their peak in 2021.
Prior to 2022, the economic situation leading into 2022 allowed crypto to shine. Investor interest in crypto was evident as Bitcoin and Ethereum both reached all-time highs, DeFi protocols grew to record size, the crypto marketcap topped $3 Trillion, CeFi businesses saw incredible growth and offered spectacular yields, the NFT market grew exponentially, and VC firms were piling in.
Early in 2022, central banks around the world began to raise interest rates in order to slow inflation and decrease the rate of economic expansion. The tightening of monetary and fiscal policies has dramatically decreased investors’ appetite for risk and speculative investment strategies.
New and exciting projects, like TerraLuna, began to implode as traders exited the crypto markets. CeFi intuitions were overleveraged, having lent significant funds to hedge funds like Three Arrows Capital, who lost tremendous capital in the sell-off that followed the failure of TerraLuna. Companies like Celsius and Voyager Digital, who promised attractive yields to users, failed and users lost their funds.
By the end of the summer, crypto markets were showing signs of stabilizing. The CoinDesk Market Index (CMI) rose to a summer high level of $1,092 on September 12th. Confidence was returning to the markets, driven by FTX, who rescued large CeFi lender, BlockFi, from bankruptcy.
Confidence in crypto markets continued into the late fall of 2022, until shocking revelations around FTX and sister company Alameda Research came to light. The previously healthy company FTX, was discovered to be insolvent, having commingled customer deposits and funds. The CMI plummeted to a low of $795 as investors continued their exodus from crypto markets.
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Decrypting Crypto
Top Five Crypto Tax Questions, Answered
(Yunha Lee/CoinDesk)
Tax filing day may be months away, on April 18, 2023, to be exact. But, if you’ve bought, sold, traded, earned or lost cryptocurrency this year, now is the time to prepare. CoinDesk spoke to tax experts to answer the most commonly asked questions about crypto and taxes in the U.S.
👉 How does the IRS know you own crypto?
In 2022, there are two main ways the federal agency keeps track.
The first is through self-reporting. The U.S. Individual Income Tax Return form, known as Form 1040 asks if at any time during the past year “did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Each filer must answer with by checking a box for “Yes” or “No.”
The second way – a “John/Jane Doe Summons.” This summons compels crypto brokerages to share user data with the federal agency, so that data can be used to identify, audit and prosecute taxpayers avoiding paying their share of taxes on crypto gains.
👉 How much do you have to pay in taxes?
Calculating how much cryptocurrency tax you owe in the U.S. is based on how long you’ve held the assets prior to disposing of them, as well as which income tax bracket you fall under.
Short-term capital gains: If you hold cryptocurrencies for 12 months or less, your capital gains rate is the same as your ordinary income tax rate, which is dependent on your total income.
Long-term capital gains: If you hold cryptocurrencies for 12 months or more, the capital gains tax is much lower than short term. Most filers will not pay more than the 15% rate.
👉 Can you write off a crypto loss?
Yes. Many people’s portfolios are in the red now, so they may be prudent to lock in capital losses on their assets.” Capital losses can be used to offset any capital gains tax to reduce your overall tax bill.
👉 How are crypto gifts taxed?
Crypto gifts are not taxable upon the initial transfer from the owner to the new gift recipient. In the U.S., gifts up to $16,000 per single recipient and $32,000 per married couple are tax free in the 2022 year.
👉 How are earnings from mining taxed?
The IRS is clear that taxes on mining earnings count as income tax, based on the fair market value of the crypto the day you received it.
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The cryptocurrency’s price needs to trade above its 21-week moving average to confirm a bottom, one trader said.
Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.
