‘You have to pay taxes on crypto’, but this legal exemption could lower them – David Spencer, The Blockchain Accountant

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(Kitco News) – The government has everything they need to track your crypto traders, but business expenses and key tax code exemptions can reduce your tax bill dramatically, according to David Spencer, owner of DKS Tax and Consulting.

Spencer, a CPA who specializes in digital assets, spoke with Kitco News reporter Ernest Hoffman on March 31. He didn’t mince words when asked what he tells clients who think they can get away with not declaring crypto.

“Well, the first thing is they won’t be customers for very long,” he said. “If you fail to report more than 25 percent in income, now you’re not going to have tax problems anymore, you’re going to have fraud problems. If you made 100k and failed to report 25k floating around in crypto that you thought no one could see, you’re going to be in some serious trouble.”

“You have to pay taxes on crypto, that’s the news.”

He said, contrary to what you might hear in some crypto circles, the tax authorities view digital assets essentially the same as other investments.

“From a tax perspective, they’re generally the same,” he said. “What did you pay for the asset and what did you sell it for? It’s a subtraction that most accountants can handle.”

Spencer said the key to any accountant’s ability to minimize their clients’ tax bill is knowing what questions to ask. “Making sure we understood their trading patterns and we’ve understood where the losses and where the gains are coming from,” he said.

One area where digital assets such as cryptocurrencies really differ from other assets is that they are still exempt from the wash sale rule. “In a traditional asset like a stock, if you sell the asset at a loss and then buy it back earlier than 60 days, the sale will be considered a wash sale, and the tax benefits that came with selling it at a loss are going to be washed away,” Spencer said. “But in the digital asset space, those rules haven’t been applied yet.”

If you’re primarily a crypto trader, Spencer said year-end tax loss harvesting is going to be very important to you, and knowing about the wash trade exemption can actually change the way you trade because you can get right back in in a position you exited at a loss while still retaining the tax advantage.

“Wins can happen quickly in the digital resource world, and you want to take your wins when they happen,” he said. “I’ve seen a lot of people who said, ‘I was a millionaire two or three weeks ago.’ So take your winnings as they come, and then at the end of the year, when it’s time to do tax planning and think about how you can minimize tax liability … more than happy to help.”

Spencer said investors should also consider placing their crypto trading activities and holdings under a business entity. “It can be a very powerful strategy depending on the level of activity, the type of trade, the type of assets,” he said. “If you have a large stake portfolio, it can be very, very powerful. If you’re an NFT trader and you’re engaged in gas wars, these transaction fees can become a significant part of your trading activity.”

“If you put that activity into some type of entity, you can take advantage of business expenses that were used to produce that income.”

2022 was a down year for crypto, and most investors’ holdings were in the red, so the strategy is to use crypto losses to offset taxable gains elsewhere. If this year’s trend continues, 2023 could find many digital asset investors sitting on massive gains.

Spencer warned against the temptation to hide your income. “If you have gains in 2023, you have a big problem,” he said. “Often the best advice is to pay your taxes and go back to work.”

“If you find a way around treasure, let me know, because I don’t know if there is one.”

To learn about other potential changes to crypto taxes, and how authorities can track your crypto traders, watch the video above.