Crypto investors who reaped hefty profits in 2021 — along with a sizable tax bill — may be surprised to find out the tax limitations of their massive losses from last year.
For instance, those losses can’t be used to offset prior capital gains for individuals, and taxpayers can only deduct up to $3,000 in capital losses per tax year against ordinary income, a deduction that remains unadjusted for inflation. Losses on crypto coins that lost nearly all their value can't be deemed "worthless" to take advantage of a tax break for securities.
That may leave some investors frustrated by what seems like arbitrary tax restrictions, especially after paying Uncle Sam last year for 2021's gains — sometimes selling crypto at a loss to foot the bill.
"Fair is just another four-letter F word," when it comes to taxes, Greg Kling, associate professor at USC Leventhal School of Accounting, told Yahoo Finance.
While corporations can retroactively deduct capital losses in the last three preceding years, individual taxpayers don’t have the option to carry back investment losses to offset previous gains, no matter what asset it’s from — stocks, bonds, or crypto.
"You have a $100,000 of capital gain income in one year and a $100,000 of loss in the next year," Kling said. "If it were symmetrical, we should be able to carry that loss back. But tax law doesn't allow us to do that."
That is a big deal for crypto investors who experienced a banner year in 2021, when the market cap for cryptocurrency reached $3 trillion and bitcoin (BTC) exceeded $68,000 per coin in November 2021. Since then, crypto has shed more than $2.2 trillion in overall value, landing the industry in an ongoing crypto winter.
One of Adnan Islam's clients, not realizing they couldn’t carry back losses, sold their crypto investments at a steep discount just to pay for last year's taxes, the digital currency tax leader at Marcum, LLP, told Yahoo Finance.
"How else are you going to pay that tax liability on the tons of crypto gains you made when all your stuff is stuck in a loss?" Islam said. "You've got to sell to get the cash to pay the tax."
Further compounding crypto investors’ woes is the $3,000 loss cap and its limitations.
The IRS only allows capital losses to be used against ordinary income — think earned income like wages, salaries, and business income — up to $3,000, after any capital gains have been offset or eliminated in that year.
"If you make a $100,000 of realized gains in one year, you have to report all that and pay tax," Kling said. "But then if in the following year, you have a $100,000 of losses and let's say that's your only capital transaction or transactions, you're limited to $3,000."
On the flip side, the IRS does allow taxpayers to carry forward the remaining capital losses indefinitely into the future, with the limit of net $3,000 capital loss per year. This limit applies even if the taxpayer accrues additional capital losses, which would be added to the other losses for future use until the deductions are exhausted.
The other drawback to the cap rule, which was written into law in 1978, is that it’s not adjusted for inflation, a salient factor since consumer price growth reached 40-year highs last year.
"It would be about $14,000 today with a CPI inflation calculation,” Annette Nellen, a professor in and director of San Jose State University's graduate tax program, told Yahoo Finance. But there’s little support to create the adjustment on Capitol Hill because any “increase is going to be a revenue loser,” she said.
Taxpayers who deduct the loss for crypto coins that imploded in value — such as FTT (FTT), a native currency of FTX exchange that recently declared Chapter 11 bankruptcy; and Luna and TerraUSD, both of which cratered in May — also can't benefit from selling under the “worthless” security rule.
Tax law says if taxpayers have securities that became worthless during the year, the full amount of loss can be recognized as capital losses in that year — even if investors still hold the security. The capital loss, though, is still subject to the $3,000 limit.
Experts don't believe this deduction would be allowed for FTT, Luna, or TerraUSD because nowhere in the IRC 165(g) — a tax code that governs the worthless securities rule — alludes to cryptocurrency. The code begins with: "If any security," Islam noted.
"You could just stop reading right there," he said. Crypto "is not a security."
That means the best way for investors to cement losses is to simply sell the cryptocurrency, Nellen said.
"If someone really wants to get the loss," she said, "they probably should sell it — even for its small value — to an unrelated person to get a capital loss."
Rebecca is a reporter for Yahoo Finance.
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube
Millennials are more apt to step in and buy equities during sell-offs, according to data compiled by TD Ameritrade.
Retailers struggled through the holiday season, new data shows.
Consumer expectations for inflation over the next year dropped to the lowest level since July 2021, according to a survey from the New York Federal Reserve released Monday.
Executives of bankrupt crypto lender BlockFi Inc have repaid an investor $15 million to settle a threatened lawsuit over the company's cratering equity value in summer 2022, the company's attorneys said Monday in bankruptcy court. The settlement resolved claims by the investor, identified only as "Counterparty A," who had purchased equity shares that were issued as part of executive compensation packages, BlockFi attorney Joshua Sussberg said at a bankruptcy court hearing in Trenton, New Jersey. The shares were sold at a discount to the company's January 2022 valuation of $6 billion to $8 billion, but their value plummeted over the summer as the collapse of two cryptocurrencies caused widespread havoc in crypto markets.
Yahoo Finance contributor Mandi Woodruff-Santos highlights how workers should be paying attention to economic data when paying off debt, making moves in the labor market, and leveraging sign-on benefits with a new job.
Elon Musk is used to facing critics, haters and detractors. He even likes these battles very much. Sometimes he even tends to provoke his supposed enemies. The Techno King, as he's known at Tesla , likes to turn his opponents' attacks into counterattacks.
U.S. stocks closed mixed on Monday after failing to sustain momentum from the first big rally of the year last week.
The food and beverage conglomerate hopes its new product will capture the sought-after Gen Z cohort.
The SECURE 2.0 Act, signed by President Biden in December 2022, includes dozens of changes to provisions related to tax-advantaged retirement accounts. Among the most important changes is a provision, which took effect Jan. 1 of this year, that delays … Continue reading → The post Your Required Minimum Distributions (RMDs) Have Officially Been Pushed Back appeared first on SmartAsset Blog.
After Prince Harry details how he lost his virginity in his new memoir Spare, Yahoo UK looks back at all those he has been romantically linked to over the years.
The Dow Jones Industrial Average rose Monday morning ahead of earnings season. Tesla stock continued to bounce after hitting a new low Friday.
It looks like investors misinterpreted a few details about the business intelligence company's relationship with the crypto market.
CoinShares released data which shows general outflows from crypto products the past week, though not with Ripple’s XRP.
The agency also barred Steve Easterbrook from being an officer or director of a public company for five years.
(Bloomberg) — Exchange-traded fund investors are piling into bets on junk bonds as the securities start the year with a strong comeback.Most Read from BloombergUS Safety Agency to Consider Ban on Gas Stoves Amid Health FearsGoldman to Cut About 3,200 Jobs This Week After Cost ReviewCommodity Ship Heads for Inspection After Suez Canal MishapStocks Give Up Rally Above Key Mark After Fedspeak: Markets WrapMorgan Stanley Warns US Stocks Risk 22% SlumpMore than $1.7 billion flooded the $18 billion i
Teva said on Monday it has either already settled with or confirmed participation from 48 of the 50 states and will continue to pursue participation by the states that are yet to join. The company in November finalized the settlement agreement to resolve thousands of U.S. lawsuits over the marketing of opioid painkillers and agreed to pay up to $4.25 billion, including a supply of the overdose drug naloxone. State and local authorities have said they will use the money to combat the opioid crisis.
Tilray Brands Chairman and CEO Irwin Simon joins Yahoo Finance Live to discuss the cannabis company's second-quarter earnings and growth outlook, while also commenting on the prospects of marijuana legalization amid a new Congress.
Macy's had a poor holiday season. Here's how to be thinking through the retail trade. More on that, and what else to watch in markets on Monday, January 9, 2022.
U.S.-based electric vehicle (EV) company stocks took off today after what had been a relatively rough start to 2023. After the first week of the year, stocks of EV makers Rivian Automotive (NASDAQ: RIVN) and Lucid Group (NASDAQ: LCID) along with charging network company ChargePoint (NYSE: CHPT) were down between 5% and 11%. Lucid and ChargePoint stocks were up 7% and 13.6%, respectively, at that time.
Over the last 30 years I’ve accumulated a lot of “junk” from eBay (EBAY) Now, I’m also trying to clean out my house, and sell it at cost or a small profit. With eBay now sending out 1099s, I believe I have to pay taxes on the profits. Is it possible to use the income figure on the 1099, say $6,000, and contribute this amount to an IRA rather than claim the small profit and pay taxes?
Author
Administraroot
Related Posts
