Frankfurt, Hesse, Germany - April 17, 2018: Many coins of various cryptocurrencies
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As holiday gatherings and year-end gift-giving come to the fore, here are a few things cryptocurrency investors should keep in mind.
Crypto tax planning and preparation are getting a lot of attention with the IRS Comment Period We have recently closed on proposed regulatory changes, but that is only part of the story. As the holiday season approaches each day, there are bound to be dinner table conversations about all sorts of topics, and cryptocurrencies will certainly be among them. In recent years, reflecting the dramatic rise and fall of prices and market sentiment, cryptocurrency investors and advocates have been either celebrated or ridiculed on such occasions. This year will be no different, with multiple cryptocurrency-related stories making headlines, including how the recovery in cryptocurrency prices could impact charitable contributions and other year-end tax planning strategies.
Specifically, the past year has been tumultuous for the crypto space and those involved in it, whether as an investor, developer, or entrepreneur. On the one hand, the continuation of lower price levels, aggravated by the recently concluded drama of the ftx judgment, has placed a negative pall over space. The regulatory crackdown and public statements are sure to reignite questions about whether the entire space is a giant scam, and investigations into even well-regarded companies like PayPal
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Let's take a look at the topics and trends that cryptocurrency investors should be prepared to discuss during the upcoming holidays.
Why the SEC is suing everyone
To say that the SEC has taken a Active role in law enforcement actions over the past year would be an understatement. Especially confusing for some might be the seemingly rapid shift in approach, from a hands-off approach for years, to one that seemingly cracks down on all market players. Investors and crypto industry veterans are well aware of the details driving these stocks, but to outsiders it may seem like a mystery. Fortunately or not, depending on your perspective, the reasons behind this apparent change of course can be summarized in a few statements.
The SEC and other US regulators and policymakers were caught off guard (some would say embarrassed) by both the spectacular collapse of FTX and the perception that US politics had been influenced by the company. Although the timing of these enforcement actions can be classified as coincidental, the reality is that, encouraged by calls from across the market, regulators have taken a much more proactive approach. Another reason the SEC appears to be involved in all enforcement actions is that other regulatory bodies and agencies have taken a back seat in developing authoritative standards. The exception to this is the IRS, which has continually expanded and refined tax guidelines related to cryptocurrencies.
In the meantime, however, it appears that the SEC will remain the primary regulator in this space, so negative headlines may continue to dominate the media.
How Price Recovery Affects Tax Planning Strategies
Cryptocurrency investors have reason to celebrate as 2023 enters the home stretch and prices have recovered across the board. Bitcoin specifically is up 60% in 2023ranking as one of the best-performing assets of 2023. Besides the obvious good news that these price increases are for investors, it also has implications for year-end tax planning and charitable giving.
Tax loss harvesting Because cryptocurrencies are a practice where, simply put, investors sell coins, tokens, or NFTs that have fallen below where they were purchased (cost basis) to recognize those losses. Specifically for cryptocurrencies, wash sale rules do not apply (yet), so if investors believe in the project for the long term, these same crypto assets can be bought back without further tax complications. These harvested losses can be used to offset other taxable income.
Cryptocurrency-related charitable contributions have continued to rise, and with crypto assets rising significantly from the lows of early 2023, this could lead to a surge in investors looking to donate/contribute crypto assets. Investors who wish to do so should remember that contributing cryptocurrency may trigger some additional filing and compliance requirements. For contributions with a value greater than $500, the taxpayer must complete and file Form 8283. If the taxpayer wishes to donate more than $5,000 in cryptocurrency, they will need to undergo an appraisal that meets IRS requirements or waive the charitable contribution.
Next year will be full of action
If investors and market watchers thought the last year (or several) was action-packed, the conversation will get even more intense over the next year. Among several stablecoin bills that have been introduced in Congress, the IRS is further ramping up its efforts as they plug into crypto assets, the world's largest banks and asset managers invest heavily and deploy products based on blockchain, and companies like the launch of PayPal. Stablecoins are definitely full.
Furthermore, as conversations around tokenized assets have evolved to include more everyday uses, and as bad actors like those at FTX are brought to justice, market confidence in these assets will continue to increase.
No matter what happens with a specific project, coin, or token, it seems clear that the blockchain and asset tokenization trend is here to stay.
