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Here’s How BlockFi’s Bankruptcy Could Affect Your Crypto Taxes for 2022

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Crypto firm BlockFi on Monday filed for chapter 11 bankruptcytwo weeks after the collapse of crypto exchange FTXfurther complicating taxes for investors in a difficult year.

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.

Learn more about personal finance:
As BlockFi Files For Bankruptcy, What To Know About Crypto Investor Protections
3 Lesser-Known Ways to Lower Your 2022 Tax Bill or Increase Your Refund
Here’s Why You Can Get a Third-Party Payer Tax Form for 2022

Why Crypto Investors May Have a Tax Bill

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.

How to Lower Your Crypto Tax Bill

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.

Currently, the so-called “wash sale rule— which prevents investors from buying a “substantially identical” asset 30 days before or after the sale — does not apply to cryptocurrencyhe said.

How FTX’s Collapse and BlockFi’s Bankruptcy May Affect Your Taxes

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.”

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