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BlockFi, which offers a paid cryptocurrency exchange and custody service, stop customer withdrawals before filing for bankruptcy, admitting that the company had “significant exposure” to FTX.
However, “all of these rewards are still taxable” even though investors currently cannot access their earnings, said Andrew Gordon, tax attorney, accountant and chairman of Gordon Law Group.
BlockFi officials did not immediately respond to CNBC’s request for comment.
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Despite recent losses, “early year gains are still on the books,” Gordon said.
Typically, crypto trading is most active when the market is up, and that’s when you’re most likely to make gains, he said.
However, it is also possible to make profits even when the market goes down, depending on when you bought and sold the assets.
IRS defines cryptocurrency as property for tax purposes, and you must pay levies on the difference between the purchase price and the sale price.
Although buying digital currency is not a taxable event, you may owe levies by converting assets into cash, exchanging another coin, using it to pay for goods and services, receiving payment for work and more.
If you’re sitting on crypto losses, there may be a silver lining: the ability to offset 2022 gains or carry over losses to reduce profits in future years, Gordon explained.
The strategy, known as tax-loss harvestmay apply to winnings in digital currencies or other assets, such as year-end mutual fund payments. After reducing investment gains, you can use up to $3,000 of losses per year to offset regular income.
And if you still want exposure to the digital asset, you can “sell and buy back immediately,” said Ryan Losi, CPA and executive vice president of CPA firm, PIASCIK.
While crypto taxes are already complex, they are even more obscure for FTX and BlockFi clients.
“There are different ways to deal with it, depending on the facts of the case,” Losi said.
You may be able to claim a capital loss, or “bad debt allowance”, and write off what you paid for the asset. But “it should only be done when that loss is certain,” Gordon said.
With both bankruptcy cases in limbo, clients can choose to submit a request for tax extension and wait for more details to emerge, Losi said.
“Like FTX, we suggest taking the ‘wait and see’ approach because the IRS requires the loss to be certain and complete,” Gordon said. “We don’t know, especially in these early stages with BlockFi.”