Year-End Crypto Tips for Practitioners

by Dr. Sean Stein Smith, DBA, CPA, CMA, CGMA, CFE, Lehman College (CUNY) – December 6, 2022

The cryptoasset space continues to evolve and change rapidly, and there are several major changes that tax practitioners need to be aware of as 2022 enters the home stretch.

The question about whether clients will be coming to practitioners with questions related to crypto has definitively shifted from an “if” question to a “when” scenario. While there are almost endless headlines to analyze and discuss, there are several fundamental items that practitioners should keep in mind as year-end rapidly approaches.

Ethereum Merge

Major technical changes have occurred. Something that might have gone unnoticed by practitioners not deeply immersed in the cryptoasset marketplace is the Ethereum merge which represents a seismic shift for the future of blockchain and crypto applications. Put simply, the Ethereum blockchain (the second largest blockchain and cryptocurrency) has replaced the Proof-of-Work (PoW) consensus methodology with the Proof-of-Stake (PoS) option.

So, what does this mean? The energy required to process Ethereum-based transactions will be lower by as much as 99 percent, which should be a boon to environmental groups concerned about the carbon footprint of blockchain technology. This also means that the number and breadth of Ethereum-based applications is set to rapidly increase, even in the face of lower crypto prices.

More applications and use cases mean the higher chance of questions coming into your inbox as the year comes to a close.

Tax-Loss Harvesting

Lower prices are creating a tax-planning opportunity that is unique to the crypto space. Clients who are sitting on unrealized losses, but who otherwise have capital gains, might benefit from a conversation explaining how these lower crypto prices can help them actually pay less in taxes. Tax-loss harvesting happens for all kinds of assets and does tend to peak during the last several months of the year, but crypto — under current tax laws — provides an additional benefit.

Under current tax law (as of this writing, several pieces of legislation are pending to change this) cryptoassets are exempt from wash sale rules, so clients can sell crypto that have incurred unrealized losses, recognize those losses and then repurchase the assets at that lower-cost basis.

This tax strategy, for now, should also apply to other cryptoassets that have recently achieved mainstream notoriety — non-fungible tokens (NFTs). It is true that the recent price declines for NFTs have definitely caused pain for investors, but these losses (if unrealized) might be able to be put to good use.

Cryptocurrency Regulations

Regulation is coming. There are numerous pieces of legislation that have rapidly moved to the marketplace that will — in short order — have a significant impact on the crypto landscape. Key issues to consider:

The Financial Accounting Standards Board (FASB) is finally getting into the conversation. Following years of clamoring from the profession, FASB has formally added some crypto accounting research and technical debate to its research agenda. While some crypto — notably NFTs and some stablecoins — will not be covered by this research, this is seen as a positive step forward.
The IRS will be forced to decide some issues. The headlines around the Jarrett crypto staking case might have faded from view, but that should not reduce the importance of court cases and filings. Unclear tax laws, when combined with an uptick in enforcement, continues to create both headaches and opportunities for practitioners as tax planning and strategies come to forefront in Q4 2022.
Crypto classification might be coming. Following the merge and pivot of the Ethereum blockchain from PoW to PoS, SEC Chair Gary Gensler has reignited a possible nightmare scenario for crypto investors. The same day that the merge finalized, chairman Gensler offered testimony that PoS crypto could qualify as securities under the Howey test. While that remains an open question, the fact that crypto is on the regulatory hotseat should be top-of-mind for all practitioners in the space.

Sean D. Stein Smith

Dr. Sean Stein Smith, CPA, DBA, CMA, CGMA, CFE, is a professor at the City University of New York – Lehman College. He is a member of the NJCPA Board of Trustees, a New Jersey CPA Political Action Committee Trustee and participates on several interest groups.

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