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(Kitco News) - The government has everything they need to trace your crypto trades, but business expenses and a key tax code exemption can lower your tax bill dramatically, according to David Spencer, owner of DKS Tax and Consulting.
Spencer, a CPA who specializes in digital assets, spoke with Kitco News reporter Ernest Hoffman on March 31. He didn’t mince words when asked what he tells clients who think they can get away with not declaring their crypto.
“Well, the first thing is that they won't be clients very long,” he said. “If you fail to report more than 25 percent in income, now you're not going to have tax problems anymore, you're going to have fraud problems. If you made 100 grand and failed to report 25 grand that was swimming around in crypto that you thought no one could see, you're going to have some serious issues.”
“You do have to pay taxes on crypto, that's the news.”
He said contrary to what you may hear in some crypto circles, the IRS sees digital assets essentially the same as other investments.
“From a tax perspective, they're generally the same,” he said. “What did you pay for the asset and what did you sell it for? That's some subtraction that most accountants can take care of.”
Spencer said the key to any accountant’s ability to minimize their clients’ tax bill is knowing which questions to ask. “Making sure that we understood their trading pattern and we've understood where the losses and where the gains are coming from,” he said.
One area where digital assets such as cryptocurrencies truly are different from other assets is that they are still exempt from the wash-sale rule. “In a traditional asset like a stock, if you sell the asset at a loss and then purchase it back sooner than 60 days, that sale is going to be considered a wash sale, and the tax advantages that came with it by selling it at a loss are going to be washed away,” Spencer said. “However, in the digital asset space, those rules have not been applied yet.”
If you're primarily a crypto trader, Spencer said tax-loss harvesting at year-end is going to be very important for you, and knowing about the wash-trade exemption can actually change the way you trade, because you can get right back into a position you exited at a loss while still retaining your tax advantage.
“Gains can happen fast in the digital asset world, and you want to take your gains when they happen,” he said. “I've seen a lot of people who said ‘I was a millionaire two or three weeks ago.’ So take your gains when they come, and then at the end of the year, when it's time to do tax planning and thinking about how to minimize your tax obligation… more than happy to help.”
Spencer said investors should also consider placing their crypto trading activities and holdings under a business entity. “That can be a really powerful strategy depending on the level of activity, the kind of trading, the kind of assets,” he said. “If you've got a large staking portfolio, those can be really, really powerful. If you're an NFT trader and you're engaged in gas wars, those transaction fees can become a sizable piece of your trading activity.”
“If you wrap that activity inside of some type of entity, you can take advantage of business expenses that were used in producing that income.”
2022 was a down year for crypto, and most investors' holdings were in the red, so the strategy is to use crypto losses to offset taxable gains elsewhere. If the trend this year continues, 2023 could find many digital asset investors sitting on massive gains.
Spencer warned against the temptation to hide your earnings. “If you've got gains in 2023, you've got a great problem,” he said. “Most often, the best advice is pay your taxes and go back to work.”
“If you find a way around taxes, let me know, because I don't know if there is one.”
To learn about other potential changes to crypto taxes, and how the government can track your crypto trades, watch the above video.
