Here’s how the BlockFi bankruptcy may affect your crypto taxes for 2022

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crypto firm BlockFi on Monday filed for Chapter 11 bankruptcyafter 2 weeks The collapse of the crypto exchange FTXMore complicated taxes for investors during a difficult year,

BlockFi, which provides an exchange for cryptocurrency and an interest-bearing custodial service, Customer Withdrawals Stopped Prior to the bankruptcy filing, there was “significant risk” to FTX, acknowledging the firm.

However, “all those prizes 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.

BlockFi executives did not immediately respond to CNBC’s request for comment.

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Why crypto investors may have a tax bill

Gordon said, despite the recent losses, “profits from earlier in the year are still on the books.”

Typically, crypto trading is more active when the market is going up, and that is when you are more likely to profit, he said.

However, it is possible to make profits even when the market is down, depending on when you buy and sell the asset.

IRS defines cryptocurrency as property for tax purposes, and you will be required to pay a levy on the difference between the purchase and sale price.

While buying a digital currency is not a taxable event, you can do so by converting the asset to cash, trading it for another coin, using it to pay for goods and services, receiving payment for work done, and more.

How to reduce your crypto tax bill

If you’re sitting on a crypto loss, there may be one silver lining: the chance to offset 2022 gains or carry forward losses to offset profits in future years, Gordon explained.

strategy, known as tax loss harvestingdigital currency profit, or may apply to other assets, such as Year End Mutual Fund Payments, After deducting investment gains, you can use losses of up to $3,000 per year to offset regular income.

And if you still want exposure to digital assets, you can “sell and repurchase immediately,” said Ryan Losey, executive vice president of PIASCIC, a CPA and CPA firm.

Currently, the so-called “wash sale rules” — which bars investors from buying a “substantially similar” property 30 days before or after the sale — Does not apply to cryptocurrencyThey said.

How the FTX collapse and BlockFi bankruptcy could affect your taxes

While crypto taxes are already complicated, it is even more unclear for FTX and BlockFi customers.

“It can be treated in different ways depending on the facts of the case,” Losey said.

you can do it claim capital loss, or the “bad debt deduction,” and write down what you paid for the property. But “it should only be done if that harm is certain,” Gordon said.

In both cases of bankruptcy pending, customers can opt file for tax extension Wait for more details to emerge, Losey said.

Gordon said, “Similar to FTX we would suggest taking a ‘wait and see’ approach as the IRS requires that the loss be definite and complete.” “We don’t know that, especially with BlockFi in these early stages.”