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Cryptocurrency investors who made huge profits in 2021 may be surprised to learn the tax limits for huge losses last year after paying huge taxes.
For example, these losses cannot be used to offset an individual’s previous capital gains, and taxpayers can only deduct up to $3,000 in capital losses each tax year against their ordinary income. increase. This deduction is not adjusted for inflation. Cryptocurrency losses that have lost nearly all their value cannot be considered “worthless” to take advantage of tax breaks on securities.
As such, some investors may be frustrated by what appears to be an arbitrary tax regime. Especially after paying Uncle Sam last year for 2021 benefits.
As for taxes, “Fair is just a four letter F word,” Greg Kling, an associate professor at the USC Leventhal School of Accounting, told Yahoo Finance.
no carry bag
While businesses can retroactively deduct capital losses from the past three years, individual taxpayers can take investment losses to offset their previous gains, whether they are stocks, bonds or cryptocurrencies. No repeat option.
“You have a capital gain income of $100,000 in one year and a loss of $100,000 the next year,” Kling said. Tax law doesn’t allow it.”
This is for crypto investors who have had a banner year in 2021, when cryptocurrency market cap reaches $3 trillion in 2021 and Bitcoin (BTC) surpasses $68,000 per coin in November 2021. is a big deal. As the value rises, the industry enters the ongoing crypto winter.
One of Adnan Islam’s clients sold his cryptocurrency investment at a steep discount just to pay last year’s taxes, unaware that he could not carry forward losses, says Marcum, LLP’s Digital Currency Tax The leader told Yahoo Finance.
“How else are you going to pay taxes on your massive cryptocurrency gains when all your assets are stuck at a loss?” Islam said. “You have to sell to get the cash to pay your taxes.”
capital loss limit
Adding to the woes of cryptocurrency investors is the $3,000 loss cap and limits.
IRS allows up to $3,000 in capital losses to be used against regular income (think earned income such as wages, salaries, and business income) after capital gains for the year have been offset or eliminated doing.
“If you make $100,000 in realized gains in one year, you have to report all of it and pay taxes,” Kring said. Assuming it’s the only capital transaction, it’s limited to $3,000.”
Conversely, the IRS allows taxpayers to carry forward remaining capital losses indefinitely, capping capital losses at $3,000 per year. This limit applies even if the taxpayer has incurred additional capital losses. This is in addition to other losses for future use until the deduction is exhausted.
Another drawback of the cap rule, enacted in 1978, is that it is not adjusted for inflation. That’s a notable factor since last year’s consumer price growth hit his 40-year high.
Annette Nellen, a professor and director of the graduate tax program at San Jose State University, told Yahoo Finance, “It’s going to be about $14,000 today with CPI inflation calculations. It’s going to be a loss of revenue,” she told Yahoo Finance. rice field.
“Worthless” security deduction
Taxpayers deducting losses on cryptocurrencies that have plummeted in value, such as FTT (FTT), the native currency of the FTX exchange that recently declared Chapter 11 bankruptcy. Luna and TerraUSD also fell in May, but under the ‘no value’ security rule, no profit can be made.
According to tax law, if a taxpayer has a security that has become worthless in that year, the full loss may be recognized as a capital loss in that year, even if the investor still holds the security. there is. However, he is subject to a $3,000 limit on capital losses.
Experts do not believe that this exemption would be allowed for FTT, Luna, or TerraUSD, as there is no mention of cryptocurrencies anywhere in IRC 165(g) (the tax code governing valueless securities rules). Hmm. The code starts like this:
“Stop reading on the spot,” he said. Cryptography is “not a security”.
So the best way for investors to lock in losses is to simply sell the cryptocurrency, Nellen said.
“If someone really wants to take a loss, they should probably sell it to someone unrelated to get a capital loss, even if it’s of little value,” she said. .
Rebecca is a reporter at Yahoo Finance.
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