Failing to take advantage of tax-loss collections is one of the biggest mistakes people make with their tax returns, said Danny Talwar, tax director at crypto tax software company Koinly.
Talwar told Cointelegraph ahead of the April 18 US tax deadline that for investors who suffered losses in the market during 2022, this is the last chance to report losses and “try to get some good” by offsetting losses with any gains made in the previous year . Tax-loss harvesting occurs when an investor sells at a loss to offset capital gains taxes owed on the sale of a profitable asset.
"That's probably the biggest mistake people make, not realizing that they can use their tax losses to harvest," Talwar said. "A lot of people might think, 'Oh, I didn't make any money in crypto, so I don' t have to pay taxes this year,' but you can actually get that benefit. So it's probably one of the biggest strategies people can use."
However, he also noted that to claim damages, you "have to be aware of the damage in some way." "The IRS is very clear that if something drops in value and you haven't actually sold it, you can't claim a loss."
Talwar said to be aware that tax-loss harvesting may lead some to engage in a "wash sale," an IRS rule that prevents individuals from selling or trading stocks or securities at a loss and then buying the same asset within 30 days of the sale . Since digital assets are not classified as securities, cryptocurrencies are currently exempt from these same rules; however, US President Joe Biden's upcoming budget proposal proposes a crackdown on cryptocurrency wash sales.
"Rules can change very quickly and they can be changed retroactively. So you really have to be careful because you have to understand the risks." Talwar said the IRS may still look into whether the transaction is genuine, "if you're doing something just to get a tax advantage."
"I wouldn't encourage people to do it, but at the same time, people are doing it."
After the IRS clarifies the matter, those caught up in currency scams or exchanges such as FTX crashing may not be eligible to claim them as damages, Talwar argued.
“The IRS actually came out and clarified this practice because people wondered if they could claim damages on things like FTX or even rug pulling,” he said.
Ultimately, "the best strategy is to actually pay your taxes" and get professional advice before tax season, Talwar said. Talking to an accountant can help discover "what deductions and benefits are available". "Obviously, hiring an accountant can help with any complex issues or challenges around what to do." For those who do not have their documents ready, Talwar said there is an option to apply for an extension, but they "still have until April 18 to pay their taxes."
