In this edition, we gear up for tax season with insights from Anthony Tuths of KPMG, who provides a comprehensive guide to crypto tax preparation and the essential rules to follow. Additionally, Layne Nadeau from NVAL addresses common questions about taxes and NFTs in our Ask an Expert segment.
– Sarah Morton
Understanding Crypto Taxes: What You Should Know
As we wrap up the 2024 tax year, it’s crucial to prepare for the upcoming tax filing season, especially if you’ve engaged in cryptocurrency trading. Here are key points to consider as you gather your tax documents.
Time is of the Essence
A significant number of U.S. centralized exchanges will provide you with an IRS Form 1099, but not all exchanges will do so. It’s important to start organizing your tax records as soon as possible. Even if you receive a 1099, it may not include cost basis information, leaving you to calculate it yourself. Non-U.S. exchanges and DeFi protocols often do not provide any tax information, adding to the complexity of your tax preparation.
Accurate Record-Keeping is Essential
To accurately compute your gains and losses, maintaining precise trading records is key. This includes the cost basis for any tokens sold. If you haven’t kept real-time records during your trading activities in 2024, you will need to retrieve this information from your exchange.
Looking ahead to 2025 and beyond, the IRS mandates the use of “tax lot relief” methods. This means you must specify which portion of fungible tokens were sold and their corresponding tax basis on a wallet-by-wallet basis. For instance, if you sold tokens from wallet number 4, you cannot attribute tokens from wallet number 7 to that sale. To simplify matters, consider consolidating your wallets. Additionally, according to IRS Rule 2024-28, you must allocate tax lots before your first trade in 2025.
Income and Expenditures in Crypto
It’s vital to consider all forms of income and expenditures in the crypto space. For example, if you received an airdrop of tokens that had value at the time of the drop, you must report this as ordinary income, calculated based on the fair market value at the time of the airdrop (see IRS Rule 2019-24). This amount becomes your tax basis, which will affect any future capital gains or losses.
If you earned crypto as compensation for services, the fair market value of that cryptocurrency at the time of receipt is also reportable income and is subject to wage withholding or self-employment tax.
Strategies for Loss Harvesting
As you approach the end of 2024, you might have sold some of your digital assets at a loss—commonly known as loss harvesting. Such losses can be used to offset taxable gains, reducing your overall tax liability. Notably, there is currently no wash sale rule for crypto, meaning you can repurchase the same tokens shortly after selling them without incurring tax implications. Keep this in mind for your tax strategies in 2025.
Consider IRA Contributions
If you still find yourself with taxable gains for 2024, consider making contributions to your IRA before the April 15 deadline to create potential deductions. While direct contributions of crypto to an IRA are not allowed, with a self-directed IRA, you can contribute fiat currency and use those funds to purchase cryptocurrency.
Understanding ETF Tax Implications
If you’ve invested in a Bitcoin or Ether ETF, be aware that you may incur tax liabilities even if you didn’t sell the ETF in 2024. These ETFs are structured as grantor trusts and may sell small amounts of crypto each month to cover management fees. Each Exchange-Traded Product (ETP) provides a tax report at the end of the year that details how to calculate your gains and losses as a trust unitholder.
Wishing You Success with Your Tax Filing!
– Anthony Tuths, Digital Asset Practice Leader, Tax Principal, Alternative Investments, KPMG LLP
Ask an Expert: Tax Queries about NFTs
Q: How are non-fungible tokens (NFTs) treated for tax purposes?
A: In many jurisdictions, NFTs are classified as digital assets, thus subject to the same tax rules as cryptocurrencies. However, some regions may consider the underlying assets linked to the NFT and apply the appropriate tax treatment. Consulting a tax professional is advised for clarity.
Q: Can the “Floor Price” be used to determine the value of NFTs for taxation?
A: No, the floor price is not recognized under formal accounting or tax standards. You will need to utilize accepted accounting methods, such as market comparisons, to determine an acceptable fair market value. Accounting firms specializing in digital assets typically have partnerships with service providers that can assist.
Q: Is it possible to realize a tax loss for NFTs that have significantly depreciated in value?
A: Yes, if selling the NFT seems implausible, there are services like UnsellableNFTs.com that will “buy” illiquid NFTs for a small fee, allowing you to record a capital loss. Alternatively, to mitigate risk from unclear tax guidelines, consider transferring your NFT to a burn wallet, such as a standard ETH burn address.
– Layne Nadeau, CEO, NVAL
In the News: Significant Developments in Crypto
U.S. Federal Reserve Chairman Jerome Powell emphasized during a recent Senate hearing the need to address the “debanking” of legal business sectors, including digital assets.
As of February 7, 22 U.S. states are actively investing in or proposing legislation to utilize cryptocurrency as a strategic reserve.
In an interesting regulatory move, Hong Kong is allowing Bitcoin and Ether holdings to serve as proof of assets for visa applications.
