You Can’t Take your FTX Losses Yet, but You Still Have Options
Crypto taxes can be an intimidating concept, but understanding the applicable laws and regulations can help you make the most of any loss in crypto. In the US, the IRS categorizes cryptocurrency as taxable property, meaning any income earned or capital gains made from the sale of crypto is subject to taxes. On the flip side, any losses incurred can be used to reduce the tax burden in the upcoming year.
In 2022, the crypto markets experienced significant turbulence, with many crypto assets losing more than half their value and major exchanges like FTX filing for bankruptcy. As a result, many investors will be able to leverage their losses to lower their 2022 tax liability. In the US, you can deduct up to $3,000 in capital losses from your taxable income, with any losses exceeding the annual limit being carried over to the following year. That is true even if you ONLY had losses. Meanwhile, if you had capital gains, you can deduct any losses in crypto against those.
The taxation amount on capital gains depends on how long the asset is held before it is sold. Any assets held for less than a year are subject to short-term capital gains taxes, whereas any assets held for over a year are subject to long-term capital gains taxes.
That said, those hoping to recover losses from FTX and other bankrupt entities may be at a loss. A crypto asset tied up in a bankrupt company isn’t technically a loss yet. However, when the bankruptcies are finalized in 2023, you will have more clarity on the amount of loss you took and the type of deduction you can receive. As specifics depend on the findings of the bankruptcies. It is possible that your money may be recovered as well.
The Bottomline: Many of us will get to lower our tax bill this year due to taking losses in crypto in 2022. Just keep in mind you can’t technically take your FTX, Blockfolio, etc., losses until bankruptcy proceedings are finalized.