If you lost money in cryptocurrency this year, there's a bit of good news. You can claim that loss on your taxes.
This year has been a period of massive losses, with the most popular currency, Bitcoin, trading at above $68,000 in November, then crashing to $22,900 this month.
The bear market in crypto erased $2 trillion in market value and led to several bankruptcies among crypto firms like Celsius, Voyager Digital and Three Arrows Capital, among others.
However, you can claim crypto losses and offset gains in your portfolio, accounting experts say. Trading generates gains or losses every time you buy, sell or even exchange virtual currencies.
That's because the Internal Revenue Service treats crypto as property, just like stocks or real estate, according to tax expert Elisabeth Felten, assistant professor of business at DeSales University.
Just like stocks, crypto sales and exchanges are reported on IRS forms 8949 and Schedule D, and are subject to the same limits, said Michael Gillen, head of tax accounting at Duane Morris in Philadelphia. That is, taxpayers are limited to a $3,000 capital loss, which you can use to offset other income, and losses greater than $3,000 can be carried forward indefinitely and used to offset income on future tax returns.
More good news for crypto investors, at least for the moment: There's a loophole around what's called the "wash sale" rule.
The IRS prevents investors from selling stocks at a loss and immediately buying back the stock within 30 days. It's called the "wash sale" rule.
But for now "no such rule applies to crypto, as the IRS classifies crypto as property and not a security," notes EisnerAmper accountant Brian McFarlane in a blog post.
That means "an investor can do what is called 'tax-loss harvesting' — sell their position in cryptocurrencies for a loss, then repurchasing right away," Felten explained.
This current loophole for crypto investors was supposed to end if the Build Back Better Act passed through the U.S. Senate. Compromise legislation forged by Sen. Joe Manchin of West Virginia and Senate Leader Charles Schumer of New York last week appeared likely to close it.
Crypto investor and cheerleader Anthony Scaramucci, who became a household name during his short stint as President Donald Trump's communications director, has been humbled.
The SkyBridge Capital founder acknowledged in a recent CNBC interview that his concentration in crypto was a short-term "mistake." Though he said he still thinks of crypto as a long-term winner: "I want to measure the Bitcoin investment over a four-year interval."
Investors with SkyBridge aren't happy. Scaramucci last week said that investors were trying to withdraw up to $890 million from SkyBridge's flagship fund, and Bloomberg reported that SkyBridge had suspended investor withdrawals from another one of its funds.
"We had a big position in Bitcoin," Scaramucci told CNBC, explaining that his firm bought Bitcoin when it was worth around $18,000, before its value went up to about $69,000 and then came back down to $22,000. "You take money in at the top ... and money leaves at the bottom, so I wish people would recognize that and stay calm. ... If we went from $18,000 to $22,000 everyone would be happy right now, but it didn't go that way."
At this point, regulation of cryptocurrencies is a turf war at the federal level.
Agencies are still staking out territory over which agency will oversee crypto, and that's left an enforcement vacuum and investors fending for themselves. That's despite large firms such as Fidelity starting to allow investors with 401(k) retirement accounts to buy Bitcoin.
"Anytime there's a crash, like now or 2008, investors ask, 'Why aren't regulators doing more?'" said Wharton professor Kevin Werbach.
The crypto industry "is spending more money lobbying in Washington than the defense industry" to influence which agency will regulate, said Hilary Allen, a law professor at American University. "The turf war is really starting to heat up."
