2022 was an interesting year for cryptocurrencies. Bitcoin and many other digital currencies entered another “crypto winter,” and the blockchain world was rocked by a series of high-profile collapse from TerraUSD to FTX.
The volatility sent some crypto tourists scrambling for the exits. Others saw a fresh opportunity to add to their positions at lower prices. In 2022, some 1 in 5 American adults owned cryptocurrency. That means there were an awful lot of questions about crypto taxes and IRS guidelines around cryptocurrencies.
Earlier this year, we partnered with leading CPAs to answer the crypto tax questions sent in by the public. We hope the answers below are helpful as you prepare your 2022 tax returns (due Monday, April 18, 2023). You might find the 2022 crypto tax Q&A helpful, as well.
To learn more about the cryptocurrency tax pros that answered these questions, read their bios at the bottom of this article.
Note: Readers should consult a qualified tax professional for advice specific to their situation – you can find one here. We hope this Q&A can help you ask the correct questions when you consult professional advisors on your own. Please do not take this as advice; consult a professional.
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Digital IRAs
“My IRA Bitcoin which was rolled over from my 401 Fidelity account in 2022 value decreased. When the value goes back up, will I have to pay increased tax if I sell in 2024? Or do I need to declare the loss of 2022 on 2023 taxes?”
An IRA is a tax advantaged retirement account. Assuming your IRA was properly setup, you are not required to file tax returns or pay taxes annually on the activity within the account. A decline in value is not tax deductible, nor is a gain in value inside the account reportable as income.
–Jason M. Tyra, Jason M. Tyra, PLLC
“Do I need to report sale of bitcoin that remains within a Roth IRA account?”
No, any transactions that occur wholly within an IRA are not reportable, just like with traditional IRAs.
–Colby Cross, Colby Cross CPA
Inactivity
“I didn’t sell any of my coins in 2022. Do I still have to report my holdings and pay taxes?”
Cryptocurrency transactions are taxable in two main situations, disposal and income.
1. Disposal is when you:
- Sell the crypto,
- Trade (exchange) it for another one,
- Or make a purchase with it.
2. Income is when you receive:
- Staking income
- Earn referral rewards
- Earn mining income
- Receive interest
Even though you only held your crypto assets in 2022 and didn’t sell any, you still might have a taxable event if you exchanged it for another crypto or received income from your crypto.
It’s always best to consult your tax accountant to ensure you don’t underpay or overpay your crypto taxes.
–Elmer J. Howard, Prosperity Financial Accounting
Taxable Events
“What will be the tax implications of the FTX fiasco for asset holders on impacted exchanges? I have assets in BlockFi and Gemini earn programs that are currently frozen. If they default on the return of principle and interest payments, can that be deducted as a capital loss?”
FTX will take years to unwind, in part because of the disorder that seems to have characterized that company’s record keeping, and because at least one jurisdiction is alleging criminal misconduct by the company and its executives. You will almost certainly be able to deduct a loss of some kind at some point in the future. However, the character and timing of the loss will largely depend on your individual circumstances.
–Jason M. Tyra, Jason M. Tyra, PLLC
“Can I claim losses for sales of altcoins on exchange to buy bitcoin?“
Yes, if you have an alt coin and trade it for another crypto like Bitcoin, that is a taxable event that triggers either a capital gain or loss. If that alt coin had dropped in value since it was first acquired, a capital loss would be recognized.
–Colby Cross, Colby Cross CPA
“Do capital losses only offset capital gains or do they lower taxes even in the event that ALL you had that year was capital losses? Furthermore, is there a cap on capital losses?”
Capital losses sustained by an individual person in the current year or rolled over from a prior year offset capital gains up to the amount of gain declared during the year, plus $3,000. Thus, the cap on losses allowable in a year where losses outweighed gains or where a taxpayer sustained only only would be $3,000.
–Jason M. Tyra, Jason M. Tyra, PLLC
“What if I sold & then repurchased my positions using the same dollar amount within a month?“
What you’re referring to is Section 1031 of the Tax Code. Under Section 1031, taxpayers can defer tax on gains when they sell a particular property and reinvest the proceeds into a similar property (also called like-kind exchanges).
The IRS issued IRS Legal Memo 202124008 on June 18, 2021. They conclude that the sale and purchase of cryptocurrencies do not qualify as tax-deferred “like-kind” exchanges under Section 1031 of the Tax Code.
–Elmer J. Howard, Prosperity Financial Accounting
“Is the “interest” I received on coins I kept in “Crypto Earn” on Crypto.com taxable?”
Yes, all interest received in the form of cryptocurrency is taxable. When you receive the payment in crypto, you will be recognizing income in the amount equal to the value of that cryptocurrency when it was received. This amount also serves as your cost basis. When you file your taxes, it should be reported as interest income similar to how you would report income from interest on your savings account. Then, if you sell that crypto currency in the future, you will have a capital gain or loss equal to the amount you sell it for minus your cost basis (when it was first received).
–Colby Cross, Colby Cross CPA
“How do I report staked coin gains if I don’t sell them? If I must pay tax on them, how are they valued, and what if they drop in value after being taxed? Will I get a refund?”
Staking rewards are considered income. Individual taxpayers report this as “Other Income” on Form 1040 Schedule 1.
The cost-basis (value) is the dollar value it had when you received it. So, for example, if it’s worth $100 when you receive it, you would claim $100 as “Other Income.”
No, you will not receive a refund if the value of the assets drops before you dispose of them; however, you do get to claim a capital loss. For example, if you paid $100 in “Other Income” and the value of the crypto dropped $20 when you disposed of it, you would claim a $20 loss on Form 1040 Schedule D.
It’s always best to consult your tax accountant to ensure you don’t underpay or overpay your crypto taxes.
–Elmer J. Howard, Prosperity Financial Accounting
“I had Luna and it tanked losing all of its value – how does that get reported as a loss but it was locked in Voyager and I could not sell it. Can I still claim the loss?”
As we’ve all noticed lately, and some of us painfully so, several crypto coins have failed. Some have completely collapsed while others have reduced to less than pennies on the dollar. You may be wondering now if you have any recourse to claim a short or long term capital loss on your 2022 tax return. The answer lies in the status of your holdings.
Three Scenarios
1. My worthless coins were transferred to another coin.
If the “exchange” was merely a rebranding of the coin, such as when LUNA turned into LUNC. The IRS has generally not considered these situations as a taxable event. However, if the coin was transferred to a completely different coin, you would have a taxable exchange and a loss if the original basis is more than you receive.
2. My worthless coins are still on a “viable” exchange.
In this situation you’re out of luck. As long as the coin is still in existence there is no taxable event and therefore no loss to be reported. You have what is known as an unrealized loss on your holdings. If you sell these coins, you will then trigger the taxable event and be able to write off the capital losses.
3. The exchange closed and I can never retrieve my investment.
In some cases where the exchange has no trading volume and there is no reasonable expectation of return, you can write off your losses. But as with all interactions with the iRS, you should have back-up documentation and a reasonable position, otherwise you could be subject to penalties for an uncertain tax position.
–Ernest L. Tomkiewicz, Ernest L. Tomkiewicz, CPA, PLLC
Recording, Reporting, and Requirements
“My husband and I received about $400 in interest last year in our Voyager account, but they bankrupted in July of 2022. Do we have to report that to the IRS, since we never received the money in hand? ”
This is a bit of a gray area, but the IRS guidance says to include crypto as income when you have “dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.” So there are basically two arguments here – one being that even though you don’t have dominion and control over your crypto right now, you did have it when you received the rewards, so the income should be reported. But there’s also an argument that these exchanges were always insolvent, so that crypto was never really yours and you essentially never had that dominion and control. As of right now it seems like the IRS is aligned with the first argument though, because I have had clients receive 1099-MISC forms from Voyager with their interest income reported in “Box 3 – Other Income”, which means that that income has been reported to the IRS, and if you don’t include it, you will get a tax notice.
–Laura Walter, Crypto Tax Girl
“I had a 401k at my last job and when I left I rolled over to another 401k plan but I
took out 60k and had them take out $5500 for early payment taxes since I am 59 yrs old. With that money, I got a Coinbase account and put it all in multiple crypto. I have not taken or sold any of the crypto as it is my investment. What will I need to report taxes on? ”
If you have just held the crypto since purchasing it, then you don’t need to report anything. You only need to report capital gains or losses if you sell, trade, or spend your crypto, and you have to report any interest, staking, or other rewards as income. As mentioned though, you will need to report the $60K as an early withdrawal on your tax return, and you will pay income tax and an early withdrawal penalty on that $60K (assuming it was a traditional 401K).
–Laura Walter, Crypto Tax Girl
“We sold some Bitcoin to buy Ethereum through Coinbase in February of 2022 and had a loss of $2062. What form or forms will we need to take the loss on our taxes? ”
You will report this loss on Form 8949. If you held the BTC for less than a year before selling, you will check “box C”, but if you held it for more than a year, you will check “box F.”
–Laura Walter, Crypto Tax Girl
Tax Specialist Bios
A special thanks to all the crypto tax professionals who answered your additional questions for the 2023 tax season. Below is the professional background information of each specialist.
Colby Cross, Colby Cross CPA
After getting involved in the crypto space in 2013, Colby Cross is an expert in cryptocurrency taxation and has been helping crypto investors with tax compliance and tax planning since 2017. Whether you are involved in basic trading, mining, staking, NFTs, DeFi, or are involved in a crypto business, Colby can help with the taxes. Crypto is all he does.
Elmer Howard, Prosperity Financial Accounting
We specialize in tax returns (business and personal), cryptocurrency taxes, payroll, and outsourced CFO services. We strive to help our clients prosper and become successful. Let us take care of your accounting needs so you can concentrate on doing your genius and building up your business. You can trust us to keep you organized and on the right track to reach your financial goals.
Laura Walter, Crypto Tax Girl
Laura Walter is a CPA who specializes solely in cryptocurrency tax issues. She’s been a leading expert in the crypto tax space since 2017 and her goal is to bring tax clarity to those who currently hold crypto, or to those who are looking to do so in the future. Laura offers tax consultations, crypto gain & loss reports, tax returns, tax advisory services, crypto tax courses, and free crypto tax advice all year long on Twitter @cryptotaxgirl.
Ernest L. Tomkiewicz, Ernest L. Tomkiewicz, CPA, PLLC
Ernest L Tomkiewicz has worked as an accountant and auditor for decades providing tax services across the US. He has studied the phenomenon known as cryptocurrency for years and follows the IRS pronouncements daily. Investing on several platforms has provided unique insight into how crypto works. In addition to being a certified public accountant he is also a certified fraud examiner.
Jason M. Tyra, Jason M. Tyra, PLLC
Jason M. Tyra is a Certified Public Accountant licensed to practice in the States of Texas and New York, an Attorney licensed to practice in Texas, and an ACFE Certified Fraud Examiner. Jason is a member of the Texas Society of Certified Public Accountants, the American Institute of Certified Public Accountants (AICPA), the Association of Certified Fraud Examiners (ACFE), the American Bar Association, and the Dallas Bar Association. His specific areas of practice include:
- Federal, state, local tax matters
- Assurance & attest services
- Equity crowdfunding & private placement support
- Virtual currency process accounting & taxation
Jason has previously contributed to Bitcoin Magazine, and Coindesk, where he writes about tax and accounting issues affecting entrepreneurs and individuals who employ virtual currencies as a means of payment and store of wealth.
Note: The information presented in the article above is intended for educational purposes only. It is in no way meant to offer financial advice, and specific guidance about how to properly pay taxes in each individual case should be sought from a certified accounting professional.
Looking for CPA Crypto professionals that might be able to help with your taxes? Check out our growing directory of professionals.