Danny Talwar

‘Biggest mistake’ is not using tax loss harvesting: Koinly head of tax

Failing to utilize tax loss harvesting is one of the biggest mistakes people can make on their tax returns, according to the head of tax at Koinly.

Failing to utilize tax loss harvesting is one of the biggest mistakes people make on their tax returns, according to Danny Talwar, the head of tax at crypto tax software firm Koinly.

Speaking to Cointelegraph ahead of the April 18 United States tax deadline, Talwar said that for those investors who experienced losses in the market over 2022, this is the last chance to report the loss and “try and get some of that benefit” by offsetting it against any gains made in the previous year.

Tax-loss harvesting occurs when an investor sells at a loss to offset the amount of capital gains tax owed from selling profitable assets.

“It’s probably the biggest mistake people make, not realizing they can use tax loss harvesting,” Talwar said.

“A lot of people might think, ‘oh, I’ve not made any money on crypto, so it’s not taxable this year,’ but you can actually get that benefit. So that’s probably one of the biggest strategies people can use.“

However, he also noted that to claim a loss, you “have to have realized the loss in some way.“

“The IRS was quite clear that you can’t claim a loss on something if its value has gone down and you haven’t actually sold out of it.“

Talwar says to be mindful that tax loss harvesting can lead some to commit a “wash sale,” which is an Internal Revenue Service (IRS) regulation that prevents an individual from selling or trading stock or security at a loss, then buying the same asset within 30 days of the sale.

As digital assets have not been classified as securities, crypto is currently not under these same rules; however, U.S. President Joe Biden’s upcoming budget proposal has proposed a crackdown on crypto wash sales.

“Rules can change very quickly, and they can change retrospectively. So you really have to watch out as you have to understand the risks.”

Talwar said the IRS may still investigate whether a transaction was genuine “if you’re doing something just to get a tax benefit.“

“I wouldn’t be encouraging people to do it, but at the same time, people are doing it.“

Talwar believes that those caught up in coin scams or exchange collapses such as FTX might not be eligible to claim them as losses after the IRS clarified the matter.

“The IRS actually came out and clarified the approach on that because people were wondering whether they could claim losses on things like FTX or even rug pulls,” he said.

Ultimately, Talwar says, “the best strategy is to actually pay tax” and get professional advice ahead of tax season. Talking to an accountant can help uncover “what reliefs and benefits are available.”

“Obviously, using an accountant can help to navigate any of that complexity or challenge around what to do.“

For those that don’t have their documents ready, Talwar says there is the option to file for an extension, but they’ll “still have to pay the taxes by April 18.“

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Magazine: Crypto audits and bug bounties are broken: Here’s how to fix them

Study claims 99.5% of crypto investors did not pay taxes in 2022

Finland and Australia had the highest proportion of tax-paying crypto investors, while the United States ranked 10th on the list, according to the study.

Swedish crypto tax firm Divly has released a new report that estimates that only 0.53% of crypto investors globally paid tax on their crypto in 2022 — however, tax experts have cast doubt on the figures and methodology.

Published on April 5, the Divly report came up with the estimate after analyzing the relationship between the number of people who declared cryptocurrency in their tax returns and the search volume for crypto tax-related keywords in various countries. It also used the number of crypto holders in each country according to Statista’s Global Cryptocurrency Report in its calculations.

The report estimates that Finland has the highest proportion of crypto investors who paid the required taxes on crypto in 2022 at 4.09%, with Australia following closely behind with 3.65%.

The United States ranked 10th on the list, with an estimated 1.62% of crypto holders paying taxes, while India , Indonesia and the Philippines had the lowest rates of tax-paying crypto investors, at just 0.07%, 0.04% and 0.03%, respectively.

The methodology used to arrive at the estimates is questionable. The report itself qualifies the results by noting that search volume data may not accurately reflect the actual number of crypto taxpayers, as not everyone who pays tax searches for crypto tax-related information online.

Another assumption in the methodology was that the number of searches related to crypto tax reporting did not vary across different countries. Additionally, it cautioned that there could be a potential bias towards countries with greater internet accessibility and more accurate search volume data.

Danny Talwar, global head of tax at crypto tax software Koinly, disputed the large portion of crypto investors not paying tax that the report suggests. He told Cointelegraph:

“It is likely that 99.5% is not reflective of countries that have specific crypto tax guidance and strict compliance requirements such as USA, Canada, Australia and India.”

Chartered accountant Greg Valles, a board member of Blockchain Australia, also said he would not be able to “say conclusively that the methodology is 100 percent accurate.”

Both tax specialists noted government data matching and surveillance efforts meant it was getting progressively more difficult to avoid crypto taxes.

Valles said that as government technology gets more sophisticated and specialized, it will become easier to detect anyone that is not complying and warned that those who fail to report their crypto profits now, risk it catching up with them in future years.

Talwar emphasized that although the risk of non-compliance for crypto is comparatively higher than other asset classes, tax authorities in many countries have processes in place to obtain data from crypto exchanges.

He added that Koinly had seen awareness of crypto tax “increase considerably” among investors in these jurisdictions, with only “15% of surveyed crypto investors” being unaware of their crypto tax reporting duties.

Magazine: Best and worst countries for crypto taxes – plus crypto tax tips

P2E gamers, minors not any safer from the tax man — Koinly

Earning an income from play-to-earns is “complicated” without tax guidance, advises Australian crypto tax specialists.

Modern parents are going to need to keep an even closer eye on their kids’ gaming habits, as some of them may be accumulating a hefty tax bill, according to a crypto tax specialist.

Speaking to Cointelegraph during last week’s Australian Crypto Convention, Adam Saville-Brown, regional head of tax software firm Koinly said that many don’t realize that earnings from play-to-earn (P2E) games can be subject to tax consequences in the same way as crypto trading and investing.

This is particularly true for play-to-earn blockchain games that offer in-game tokens that can be traded on exchanges and thus have real-world financial value:

“Parents were once worried about their kids’ playing games like GTA, with violence […] but parents now need to be aware of a whole new level […] tax complexities.”

Saville-Brown said he was approached during the convention by a father of a nine-year-old son, concerned that his boy was “making bank” from P2E games.

“The nine-year-old kid is mining, staking, creating Youtube and TikTok videos to the point that his dad had to bring him here today because he’s generating so much income,” Saville-Brown recounted to Cointelegraph.

However, the treatment of P2E game earnings — at least in Australia — can be complex.

Koinly’s head of tax Danny Talwar explained that in Australia if one is playing a game to earn income — they are considered as “running a business” and could face a “complicated” tax situation, noting:

“If you’re a professional gamer, it’s possible that you’re running a business, so you’d be treated under such rules.”

This is further complicated as the gamers could either be “playing these games as an investor” or “playing these games as a trader.”

According to the Australian Taxation Office, investors are subject to capital gains when they sell their assets, while traders doing the same thing would be seen as “trading stock in a business,” and thus any profits would be treated as ordinary income.

Talwar added that if users have “intentions to actually run as a business […] and have a business strategy,” then it will be treated as a business for tax purposes.

He brought up the popular P2E game Axie Infinity as an example of a game that might receive business treatment for tax purposes “as people use that game to earn an income.”

The tax expert advised that how one “should be treated from a tax perspective, all gets very complicated without guidance.”

He added that once you “throw in the other issue of minors under 18” playing games to earn an income and “creating in-game value, that has a marketplace with taxable consequences in doing so that people aren’t necessarily realizing.”

A similar situation could play out in the United States. Artav at Law, a U.S. Law Firm, states that complications arise because not “all P2E earnings” are the same.

There is a gray area as “what (and how) the game pays the player determines the type of taxes that particular player will owe […] is the income in the form of NFT? Tokens? Staking income? An airdrop?”

The U.S. law firm stated that whether it is called a token, cryptocurrency or virtual currency, a native token is taxed like intangible property and is subject to capital gains tax, which the Internal Revenue Service (IRS) has had “a consistent position on this since at least 2014.”

However, if you earn crypto tokens “as part of a play-to-earn game, the value of such crypto is taxable as ordinary income,” it said.

P2E gamers, minors not any safer from the tax man, says Koinly

Earning an income from play-to-earns is “complicated” without tax guidance, advises Australian crypto tax specialists.

Modern parents are going to need to keep an even closer eye on their kids’ gaming habits, as some of them may be accumulating a hefty tax bill, according to a crypto tax specialist.

This is particularly true for play-to-earn blockchain games that offer in-game tokens that can be traded on exchanges and thus have real-world financial value.

“Parents were once worried about their kids’ playing games like GTA, with violence […] but parents now need to be aware of a whole new level […] tax complexities.”

Saville-Brown said he was approached during the convention by a father of a nine-year-old son, concerned that his boy was “making bank” from P2E games.

“The nine-year-old kid…is mining, staking, creating Youtube and TikTok videos to the point that his dad had to bring him here today because he’s generating so much income,” Saville-Brown recounted to Cointelegraph.

However, the treatment of P2E game earnings — at least in Australia — can be complex.

Koinly’s Head of Tax Danny Talwar explained that in Australia if one is playing a game to earn income — they are considered as “running a business” and could face a “complicated” tax situation, noting:

“If you’re a professional gamer, it’s possible that you’re running a business, so you’d be treated under such rules.”

This is further complicated as the gamers could either be “playing these games as an investor” or “playing these games as a trader.”

Talwar added that if users have “intentions to actually run as a business […] and have a business strategy,” then it will be treated as a business for tax purposes.

He brought up the popular P2E game Axie Infinity as an example of a game that might receive business treatment for tax purposes “as people use that game to earn an income.”

The tax expert advised that how one “should be treated from a tax perspective, all gets very complicated without guidance.”

A similar situation could play out in the United States. Artav at Law, a U.S. Law Firm, states that complications arise because not “all P2E earnings” are the same.

The U.S. law firm stated that whether it is called a token, cryptocurrency, or virtual currency, a native token is taxed like intangible property and is subject to capital gains tax, which the Internal Revenue Service (IRS) has had “a consistent position on this since at least 2014.”

However, if you earn crypto tokens “as part of a play-to-earn game, the value of such crypto is taxable as ordinary income,” it said.

Celsius vows to return from bankruptcy but expert fears repeat of Mt Gox

The company says it’s planning to continue operations throughout the restructuring process, though withdrawals will continue to be paused at this time.

Crypto lending platform Celsius confirmed on July 13 that it has initiated Chapter 11 bankruptcy proceedings in the Southern District Court of New York.

The announcement was shared on the company’s Twitter and shared with account holders via email on July 13, with a vow to “emerge from Chapter 11 positioned for success in the cryptocurrency industry.”

According to Investopedia, a Chapter 11 bankruptcy allows a company to stay in business and restructure its obligations. Companies that have successfully reorganized under Chapter 11 include American Airlines, Delta, General Motors, Hertz, and Marvel according to an updated FAQ by Celsius.

Danny Talwar, head of tax at crypto accounting software firm Koinly shared his concerns with Cointelegraph that the proceedings could mean investors and customers of Celsius may not see their funds returned for the “foreseeable future,” similar to the fallout from the Mt Gox hack in 2014 which is still ongoing.

“This could be Mt Gox 2.0. Court proceedings may drag out the process of Celsius customers receiving any of their deposits back well into the future.”

“For context, Mt Gox was the largest exchange for Bitcoin from 2010 until its collapse in 2014, losing over 850,000BTC in deposits,” explained Talwar. “Customers are still awaiting the release of funds from the exchange now (in 2022), with court proceedings in multiple jurisdictions globally and in Japan.”

Celsius in a statement on July 13 said it aims to use $167 million in cash-on-hand to continue “certain operations” during the restructuring process and said it intends to eventually “restore activity across the platform” and “return value to customers.”

However, customer withdrawals are set to remain paused “at this time.”

Members of the Celsius board said the move to bankruptcy follows a “difficult but necessary” decision last month to pause withdrawals, swaps and transfers on the platform.

Celsius co-founder and CEO Alex Mashinsky added in a statement that it is the “right decision for our community and company.”

“We have a strong and experienced team in place to lead Celsius through this process. I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”

Moments ago, @CelsiusNetwork filed voluntary petitions for Chapter 11 protection and announced that the company initiated a financial restructuring. https://t.co/vf5wsT6TMp

— Celsius (@CelsiusNetwork) July 14, 2022

Through “first day” motions, the company said it intends to pay employees and continue their benefits. The company says it will also continue to service existing loans with maturity dates, margin calls, and interest payments to continue as they have in the past.

Celsius has also appointed a new director to guide it through the restructuring process, including David Barse, a “pioneer” in distressed investing who is the founder and CEO of index company XOUT Capital.

Though some in the community have taken the news as a negative for Celsius, Talwar argues that crypto investors should not panic, as a Chapter 11 bankruptcy filing will mean Celsius will commit to making their investors whole “and not just disappear.”

“Chapter 11 bankruptcy allows Celsius to restructure their debts and assets through the court system […] Crypto-investors should not panic as filing for chapter 11 bankruptcy provides some certainty for the market.”

Earlier in the day, Celsius closed off the last of its decentralized finance (DeFi) debts owed to Compound, Aave, and Maker, reducing its initial debt of $820 million to just $0.013 over the course of a month.

Talwar said repayment of its debts just ahead of filing for bankruptcy may have been required in order for “all remaining customer funds and collateral to be taken stock of.”

Celsius vows to return from bankruptcy but expert fears repeat of Mt. Gox

The company says it’s planning to continue operations throughout the restructuring process, though withdrawals will continue to be paused at this time.

Crypto lending platform Celsius confirmed on Wednesday that it has initiated Chapter 11 bankruptcy proceedings in the Southern District Court of New York.

The announcement was shared on the company’s Twitter and shared with account holders via email on Wednesday, with a vow to “emerge from Chapter 11 positioned for success in the cryptocurrency industry.”

According to Investopedia, a Chapter 11 bankruptcy allows a company to stay in business and restructure its obligations. Companies that have successfully reorganized under Chapter 11 include American Airlines, Delta, General Motors, Hertz and Marvel, according to an updated FAQ by Celsius.

Danny Talwar, head of tax at crypto accounting software firm Koinly, shared his concerns with Cointelegraph that the proceedings could mean investors and customers of Celsius may not see their funds returned for the “foreseeable future,” similar to the fallout from the Mt. Gox hack in 2014 which is still ongoing:

“This could be Mt. Gox 2.0. Court proceedings may drag out the process of Celsius customers receiving any of their deposits back well into the future.”

“For context, Mt. Gox was the largest exchange for Bitcoin from 2010 until its collapse in 2014, losing over 850,000 BTC in deposits,” explained Talwar. “Customers are still awaiting the release of funds from the exchange now (in 2022), with court proceedings in multiple jurisdictions globally and in Japan.”

Celsius, in a statement on Wednesday, said it aims to use $167 million in cash-on-hand to continue “certain operations” during the restructuring process and said it intends to eventually “restore activity across the platform” and “return value to customers.”

However, customer withdrawals are set to remain paused “at this time.”

Members of the Celsius board said the move to bankruptcy follows a “difficult but necessary” decision last month to pause withdrawals, swaps and transfers on the platform.

Celsius co-founder and CEO Alex Mashinsky added in a statement that it is the “right decision for our community and company.”

Moments ago, @CelsiusNetwork filed voluntary petitions for Chapter 11 protection and announced that the company initiated a financial restructuring. https://t.co/vf5wsT6TMp

— Celsius (@CelsiusNetwork) July 14, 2022

Through “first day” motions, the company said it intends to pay employees and continue their benefits. The company says it will also continue to service existing loans with maturity dates, margin calls and interest payments to continue as they have in the past.

Though some in the community have taken the news as a negative for Celsius, Talwar argues that Celsius’ bankruptcy filing could spell temporary relief for crypto markets:

This Chapter 11 filing allows the crypto markets to breathe a collective sigh of relief, as it likely means Celsius won’t be selling their holdings onto an already depressed market.

Talwar said repayment of its debts just ahead of filing for bankruptcy may have been required in order for “all remaining customer funds and collateral to be taken stock of.”

Portfolio in the red? How tax-loss harvesting can help stem the pain

“If you’ve made a sale during the tax year, and you’ve sold at a loss, there’s basically a benefit there,” says Koinly’s head of tax.

Crypto investors — particularly those that bought in toward the top of the market in 2021 — may be able to find some salvation through a tax-saving strategy called “loss harvesting,” according to Koinly’s head of tax in Australia.

Koinly is one of the most widely-used crypto tax accounting firms online. Australian head of tax Danny Talwar told Cointelegraph that while most retail investors are aware of their obligation to pay capital gain taxes (CGT) when they make profits, many are unaware that the opposite holds true and that losses can be used to reduce their overall tax bill by offsetting capital gains elsewhere:

“Most people are familiar with the concept of tax on gains. But, what they’re not doing is realizing that they can recognize that loss on their tax return to then offset against gains.”

Loss harvesting

Loss harvesting, also known as tax-loss harvesting or tax-loss selling is an investment strategy where investors either sell, swap, spend or even gift an asset that has fallen into the red — also known as making a “disposal” — allowing them to “realize a loss.” Investors typically do it in the final weeks of the tax year — which in Australia is right now. Talwar notes the strategy works in many jurisdictions with similar CGT laws, including the United States.

“Countries like the U.K., U.S. and Canada follow very similar capital gains tax regimes to Australia or have a kind of loss harvesting,” he said.

The concept is also embraced by traditional investors in stocks, bonds and other financial instruments. In the crypto world, a loss can be realized by converting it to fiat or just trading for another crypto token on the exchange.

Talwar believes that the surge of new crypto investors over the last few years will likely have produced quite a number of loss-making portfolios, given the current bear market:

“A lot of crypto investors got into the market around 2020 and 2021. What that means is that the majority of these people are actually going to be sitting on losses, so their portfolios are in the red.”

Will it work?

Talwar noted there are specific nuances in each country’s tax regime, such as the treatment of “wash-sales,” which could impact an investor’s ability to benefit from tax-loss harvesting, and suggested that investors reach out to their accountants to see how to best execute this strategy.

“A wash sale basically means you’re selling the same asset and reacquiring it in the same space of time, just to recognize a loss for your tax return.”

This is illegal in some countries or the tax authority could deny the claimant from realizing a tax loss.

Koinly has published guidance explaining how the rules regarding wash sales can differ from country to country.

As a general rule, Talwar suggests that anyone that has a portfolio in the red should be thinking about loss-harvesting:

“The more relevant point is if you’ve made a sale during the tax year and you’ve sold at a loss, there’s basically a benefit there that people might miss out on if they don’t put it in their tax return.”

One “extreme exception” to the case would be if an investor’s portfolio only contains loss-making crypto and nothing else. In that case, they won’t have any gains to offset.

“They should talk to their accountant. Do they have other assets that they can offset a lot against? You know, there’s no point recognizing a loss if crypto is your only investment, you have 99.8% of your savings in the bank and you’re never going to invest again.”

Tax authorities playing catch up

Talwar believes that while global tax authorities have made huge strides over the last three years to keep up with the rapidly evolving crypto industry, there’s still a lot to catch up on as more retail investors pile into the market and crypto accessibility continues to rise:

“Three years ago, it was rare for a tax authority to actually have some type of guidance on crypto out there. And, the crypto space three years ago is a completely different beast from what it is now. It’s become a lot easier to buy and sell crypto for everyday investors.”

However, Talwar noted that “not many” tax authorities have yet released guidance on how investors can record and report the use of decentralized finance (DeFi) protocols despite it gaining strong adoption in 2020.

“The UK is probably leading the way in some respects because they’ve just released guidance on decentralized finance. Not many tax authorities have released guidance on DeFi.”