Crypto holders face tricky tax situations as US taxes are due next week – here’s what you need to know

Crypto investors in the US find themselves in difficult tax situations, with many of them still struggling with losses from last year’s market downturn and the many bankruptcies that occurred.

For this year’s taxes, the Internal Revenue Service (IRS) has made adjustments to its income tax form to be more explicit about what counts as crypto holdings, with filing instructions now using the term “digital assets” instead of “virtual currency” to clarify that assets such as NFT – are also required to be reported, said the latest edition of the Bloomberg Crypto newsletter.

The change reportedly came after taxpayers were unsure whether NFTs were required to be reported.

In addition to the new terms used, the 2022 tax form also elaborates on one crypto-related question that asks if the crypto was received as a “reward, prize or compensation.”

The change in that question is part of the 2021 Infrastructure Act, which further tightened crypto reporting requirements, the newsletter said.

Taxes for 2022 are due in the US as early as next week.

Businesses can start reporting customer transactions

Although the requirements have already been tightened, there is still more to come in the near future.

Among other things, the US Treasury Department is expected to issue new rules for crypto service providers, requiring them to submit records of client transactions to the IRS.

The rules were supposed to come into force in January, but have been postponed until the text can be finalised.

Tax loss harvesting

Like every year, crypto investors who are sitting on losses can use a popular technique known as tax loss harvesting to deduct up to $3,000 in losses against their income each year.

The technique involves selling assets at a loss before the end of the tax year, then buying back the same asset shortly afterwards to realize the loss.

Still, some investors may have even bigger problems to deal with given the many bankruptcies seen among crypto companies last year. Most notable among these was perhaps the FTX collapse, which still has billions of dollars of investor money trapped.

Crypto owners who have their holdings trapped in bankrupt companies are obviously unable to sell their assets to realize losses.

And to make matters worse, some of these crypto owners may still be responsible for paying taxes on interest earned on their crypto in 2022, for example through interest-earning crypto accounts like those offered by now-bankrupt crypto lender Celsius.