Breaking: The IRS just issued a temporary relief notice that is good news for crypto holders interacting with CeFi exchanges in 2025!

TEMPORARY RELIEF UNDER SECTION 1.1012-1(j)(3)(ii 🧵 1/ Quick background first:

The IRS finalized the Sec. 6045 custodial broker (CeFi broker) regulations several months ago.

Consequently, starting 1/1/2025, if your crypto assets are held with a CeFi broker and you do NOT choose a preferred accounting method (like HIFO or Spec ID), the broker will sell your assets under FIFO.

A few hours ago, the IRS released the highly-anticipated & controversial DeFi regulations.

If you are in DeFi, big changes are coming, and here’s what you need to know 🧵 Note: These regulations mainly apply to DeFi trading platforms. So, not much for you to worry about as an individual taxpayer.

That said, there are some consequences for you as customers of certain DeFi platforms, going forward.

Heads up, crypto investors! The IRS is making BIG changes starting Jan 1, 2025, and if you don’t prep now, you could pay more in taxes or face penalties.

Here’s what you need to do before the year-end to avoid penalties, save money, and stay ahead of the game. 🧵 1/ Learn Crypto tax 101.
What’s taxable?
✅ Selling crypto for fiat
✅ Trading one coin for another
✅ Spending crypto on goods/services
✅ Earning crypto (staking, mining, rewards, etc.)
✅ Airdrops & hard forks

If you had any of these transactions, you will likely have to file Form 8949/Schedule D and/or Schedule 1 when you file your taxes.

Everything you need to know about Tax-loss harvesting and how much you can deduct on your taxes 👇

(Markets are at or near ATH but everyone has some coins/NFTs that are underwater which you can sell in December to mask future gains) 1/ What is Tax-loss harvesting (TLH)?

Selling your coins, NFTs, or stocks when their market prices fall below how much you paid for them (Cost basis)

I don't think crypto will be pseudo-anonymous or privacy-preserving anymore, at least in the US.

Yesterday, the IRS issued the long-awaited draft Form 1099-DA, the first tax form specifically designed to collect your ID and detailed transaction data at scale from "brokers".

Brokers (CeFi exchanges, certain DeFi exchanges, and wallets) will be required to generate this form for each sale transaction and submit that info to the IRS and you (similar to stock brokers) starting 1/1/2025. The Form captures unsurprising data points such as date acquired, date sold, proceeds, and cost basis of crypto assets sold.

This information is needed and helpful for the taxpayer to complete their crypto tax filings.

However, the collection and reporting of the following additional data points (especially wallet addresses) to the IRS at scale could lead to major privacy and security concerns.

Sales-related data points
Box 11a: Sale transaction ID (TxID)
Box 11b: Digital asset address from which the units were sold
Box 11c: Number of units sold

Transfer-related data points
Box 12a: Transfer-in TxID number
Box 12b: Transfer-in digital asset address
Box 12c: Number of units transferred in

Hot topic: How are bankruptcy payouts taxed and reported on taxes? 👇

1/ Background
Celsius, Voyager, BlockFi, and FTX have filed for Chapter 11 bankruptcy (Reorganization).

A reorganization allows a company to stay in business and restructure its obligations to creditors.

Account holders (creditors) of these companies are now receiving a portion of the original crypto assets they had in these platforms and/or totally new assets (coins you never had and shares of companies) as a payout. 2/ Taxation
The tax code does not directly talk about the taxation of bankruptcy payouts. Therefore, we have to figure out taxation based on case law. In simple terms, case law means rules that come from past decisions made by the courts.

💡At a high level, taxation of these bankruptcy payouts depends on whether you have a gain or loss scenario computed based on the difference between the amount realized (value of the payout at the time of receipt) and the initial cost basis of your assets.

Loss scenario (common)
Amount realized < initial cost basis of your assets.

Gain scenario (rare)
Amount realized > initial cost basis of your assets.

Let's work on some examples.

I just attended a crypto tax webinar hosted by the IRS.

Among many things they covered, I thought the following was one of the most overlooked points by taxpayers & tax practitioners - see situation 2 in the thread.

Getting this right is important for you to have an accurate return and stay out of future IRS trouble.

As you know, every taxpayer must answer the crypto question on Form 1040. The crypto question is very broad and captures a lot.

Therefore, If you deal with crypto, it's very hard for you to say "No" to this question.

That said, there are 3 clear situations where you can safely check "No" for the question despite dealing with crypto.

Situation 1: You just hodled crypto during 2023; no other activity.

**Situation 2: You transferred crypto from one wallet/exchange account you own to another wallet/exchange account you own (Transfers).

Situation 3: You purchased crypto using USD.

Some interesting stats on IRS audit rates (GAO-22-104960)👇

1/ Personal tax audit rates have declined from 0.9% to 0.25% from 2010 to 2019.

In other words, individual tax returns were audited over three times more often for the tax year 2010 than for the tax year 2019. The IRS is attributing this trend to decreased funding which reduced staffing.

Be cautious when claiming crypto & NFT tax losses during major pullbacks.

Takeaways:

❗ Sell to realize losses.
❗ Do not sell your entire underwater position thinking you can get a full tax write-off ASAP.
❗ You can deduct more than 3K in losses when planned right.

🧵 1/ Basics

Crypto is treated as "property" by the IRS.

When you sell at a profit (sale price > purchase price), you pay capital gains taxes.

When you sell at a loss (sale price < purchase price), you save taxes by claiming a capital loss.

Ten things you can do to protect your crypto and never get hacked 👇 1/ Get a Password manager.

"Ihatetaxes123" isn't a strong PW.

You can easily create and save complicated 30-character+ PW using password managers like @dashlane, @1Password & @LastPass.

They are well worth the monthly subscription.

Your passive staking rewards may not be taxed at the time of receipt.

Let me explain the facts, where we are now, and what to expect next. 👇 1/ Jarretts (Js) Vs. US Case

2019 - Js received 8,876 XTZ worth $9,407. They reported this as income in 2019 taxes.

7-31-20 - Js filed an amended return demanding a $3,793 refund. Js argued staking income shouldn't have been income in the first place.

IRS didn't respond.

You will get different types of tax reports (1099-MISC, 1099-B, 1099-K, Transaction report) from crypto exchanges this year.

Here's what they mean and how to avoid overpaying taxes 👇 1/ Form 1099-MISC

If you earned staking income, other income streams similar to interest income, or any type of reward income over $600, you will get this form.

Report this on Schedule 1, Line Z.

Everything you need to know about Tax-loss harvesting and how much you can deduct on your taxes 👇 1/ What is Tax-loss harvesting (TLH)?

Selling your coins, NFTs, or stocks when their market prices fall below how much you paid for them (Cost basis)

Web 2: account-based taxes

Web 3: wallet-based taxes (or lack of it)

There's an opportunity to build a trillion-dollar tax company on Web 3.

Thread 👇 1/ The current financial system built on Web 2 is centered around "accounts".

You start everything by signing up for an account. Your identity is tied to accounts.

Accounts are maintained by centralized 3rd parties on behalf of you.

Ex:- Bank account & brokerage account.

How NFT taxes work 👇

At a high level, NFT taxes depend on how you interact with them.

There are two ways you can interact with NFTs:

1) You can create and sell NFTs in a marketplace (Creator)

2) You can buy and sell NFTs (Investor) 1/ Creator taxes

Creators get taxed at the time they sell NFTs.

For ex, Beeple sold an NFT for $69M. This will be ordinary income to him and taxed based on his tax bracket.

Do you need a special "Crypto accountant" to file your taxes? 👇

(Disclaimer: I don't practice anymore. I have nothing to gain from this thread other than telling you the truth) 1/ Who are Crypto accountants (CAs)?

Tax pros who can apply common tax rules to ambiguous crypto-specific scenarios. They are different from regular accountants because they follow the crypto space closely.

That's all.

Ten things you can do to protect your crypto and never get hacked 👇 1/ Get a Password manager.

"Ihatetaxes123" isn't a strong PW.

You can easily create and save complicated 30-character+ PW using password managers like @dashlane, @1Password & @LastPass.

They are well worth the monthly subscription.

When are airdrops like $SOS taxed?

The answer to this question isn't as simple as you think.

Let me explain why and give you a framework to think about airdrop taxes going forward. 1/ Before we get there, remember these three points.

1.1/ There are no "crypto tax laws" yet. We only have guidance issued by the IRS. Guidance isn't the tax law. It can be challenged and interpreted differently.

(This is fine as long as you have a reasonable basis)

The $1.2 trillion infrastructure bill was just passed by the House and is heading for Biden's signature.

What does this mean for crypto holders? 👇 1/ Crypto exchanges will be required to issue 1099-Bs for the 2023 tax year similar to stock brokerages.

Impact on you: high

Expect a lot of inaccurate 1099-Bs if you trade across multiple wallets and self-custody crypto.

Ways & Means Committee is trying to close down a big crypto tax loophole - Wash sales

Thread 👇 1/ What is a wash sale?

§1091 of the IRS code - a wash sale occurs when an individual sells a stock or security at a loss and, within 30 days before or after this sale, buys a "substantially identical" stock or security, or acquires a contract or option to do so.

The final text of the infrastructure bill is out. (linked at the end)

Here's how the bill affects code sec. 6045, 6045A, 6724, 6050I & crypto users (mainly exchanges) 👇 1/ Anybody who regularly facilitates crypto transfers (ex: exchanges) between third parties for a fee will be treated as a broker.