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Crypto firm BlockFi filed for Chapter 11 bankruptcy on Monday, two weeks after the collapse of cryptocurrency exchange FTX, further complicating taxes for investors in a difficult year.
BlockFi, which offers exchange and interest-based custody services for cryptocurrencies, has suspended customer withdrawals pending filing for bankruptcy, acknowledging that the firm had “significant influence” over FTX.
However, “all of these fees are still taxable,” even though investors currently cannot access their earnings, said Andrew Gordon, tax lawyer, chartered public accountant and president of Gordon Law Group.
BlockFi officials did not immediately respond to CNBC’s request for comment.
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Despite recent losses, “earnings from earlier this year are still there,” Gordon said.
Generally, crypto trading is more active when the market is rising, and that is when you are more likely to make a profit, he said.
However, it is also possible to make a profit even when the market is falling, depending on when you bought and sold assets.
IRS defines cryptocurrency like property for tax purposes and you must pay fees on the difference between the purchase price and the sale price.
While buying digital currency is not a taxable event, you can pay fees by converting assets into cash, exchanging it for another coin, using it to pay for goods and services, getting paid for work, and more.
How to cut cryptocurrency tax
If you’re sitting on crypto losses, there could be a silver lining: a chance to offset 2022 gains, or carry losses forward to reduce gains in later years, Gordon explained.
The strategy known as the collection of tax losses may apply to digital currency income or other assets such as mutual fund payments at the end of the year. After reducing your return on investment, you can use up to $3,000 in losses per year to make up for regular income.
And if you still want access to a digital asset, you can “immediately sell and rebuy,” said Ryan Losey, CPA and executive vice president of CPA firm PIASCIK.
At present, the so-called “dummy sale rule,” which prevents investors from buying a “virtually identical” asset 30 days before or after a sale, does not apply to cryptocurrencies, he said.
How the collapse of FTX and the bankruptcy of BlockFi could affect your taxes
While crypto taxes are already difficult, it is still more difficult for FTX and BlockFi clients.
“There are different types of treatment, depending on the circumstances of the case,” Losi said.
With both bankruptcy cases in limbo, clients can apply for a tax extension and wait for more details, Losey said.
“Like FTX, we would suggest a wait and see approach because the IRS requires losses to be certain and complete,” Gordon said. “We don’t know that, especially in the early stages of working with BlockFi.”