Burned by crypto in 2022? No, we’re not talking about burning crypto here, but your crypto may be considered worthless according to the Internal Revenue Service.
There are a number of ways you could have incurred a loss due to volatility in the crypto markets or other virtual asset realm in 2022, but not all of them are considered worthless according to the IRS. Pursuant to Internal Revenue Code Section 165, taxpayers can take a deduction for losses that are evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the tax year.
What does all that mean? Perhaps you had virtual assets on the FTX platform and you can no longer access those amounts. This is an identifiable event, and you may be able to take a deduction on the losses you sustained. Or maybe you decided to burn your digital assets to increase the value of others. This is another example of an identifiable event for which you may be able to take a loss.
What if you bought a notable virtual currency at $60,000 and the value was less than $20,000 at the end of 2022, but you still have it in your wallet? If this currency is still actively trading, you won’t, unfortunately, be allowed to take a deduction since there’s been no closed and completed transaction. Even if the currency was trading for a fraction of a cent, it’s still not a closed or completed transaction and, therefore, no deduction is available. Taxpayers owning virtual currency with little value, however, may take steps to abandon their investment, which may evidence a closed or completed transaction. On January 11, the Office of Chief Counsel issued Memorandum 202302011 addressing the deductibility of cryptocurrency declines in value.
In summation, if you’ve realized a cryptocurrency loss and relinquished all rights and control to the virtual property, you may be able to take a loss. If you still hold the virtual property, however (no matter how little value it may have), and it is still able to be traded, you won’t be able to take a deduction for the reduction in value.
If you have any questions regarding the tax implications of virtual currencies or other digital assets, contact your local Schneider Downs tax professional.
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