Tips for claiming tax losses from the US Internal Revenue Service


The volatility in crypto is nerve-wracking, and it may not be over yet. The turmoil can make crypto investors and crypto-related businesses less enthusiastic than when prices always seemed to be climbing. With the market falling off a cliff, there will be big losses to claim on your taxes, right? Not necessarily. As your US dollars plummet in the digital world, it’s worth wondering if there’s any lemonade you can make claiming losses on your taxes.

First, ask yourself what happened from a tax perspective. If you’ve traded and generated big taxable gains, but the floor is falling, first ask yourself if you can pay your taxes for the gains you’ve already triggered this year. Taxes are annual and generally based on a calendar year, unless you have correctly chosen otherwise. Start with the proposition that any time you sell or exchange cryptocurrency for cash, another cryptocurrency, or goods or services, the transaction is considered a taxable event.

This is the result of the US Internal Revenue Service gunshot heard around the world in the 2014-21 notice when the IRS announced that crypto is property for tax purposes. No currency, no securities, just property, so most transactions mean the IRS wants you to report a gain or loss.

Related: What to Know (and Fear) About the IRS’ New Crypto Tax Reporting

Before 2018, many crypto investors claimed that crypto-to-crypto exchanges were tax-free. But this argument was based on Section 1031 of the tax code. It was a good argument, according to the facts and the reports. But this argument disappeared from 2018. Section 1031 of the tax code now indicates that it only applies to exchanges of real estate.

The IRS audits some crypto taxpayers from before 2018 and so far doesn’t seem to like the 1031 argument even before 2018. The IRS even issued a guideline saying that tax-exempt crypto exchanges don’t work. not. We may need a lawsuit to resolve it if the IRS pushes it that far. After all, this only applies to 2017 and previous years, so it is less and less important.

But whether you’re using crypto to pay someone, trading crypto, or selling it, do you have any gains or losses? For most people, gains or losses would be subject to short or long term capital gains/losses depending on the basis (what you paid for the crypto), holding period and price at which the cryptocurrency was sold or traded. Still, some people may have ordinary gains or losses, and this topic is worth revisiting. Do you trade crypto as a business?

Related: Top Cryptocurrency Tax Myths Busted

Most investors want long-term capital gains rates on gains if they buy and hold for more than a year. However, treatment of ordinary income might be useful for some, at least for losses. Securities traders can make a Section 475 marketing election under the tax code, but does it work for crypto? It’s not clear. To qualify, it must be argued that the crypto constitutes securities or commodities.

The United States Securities and Exchange Commission has argued that some cryptocurrencies are securities, and there may also be arguments for the characterization of commodities. It is at least worth considering in some cases. However, in addition to establishing a position that a digital currency is a security or a commodity, you must qualify as a trader in order to make a mark-to-market choice. Whether a person’s activities constitute a “trading” rather than an “investment” is a key question in determining whether a person is eligible to make a mark-to-market election.

The IRS lists details of who a trader is, usually characterized by high volume and short-term holding, although sometimes investing and trading can look quite similar.

If the crypto is found to be mark-to-market eligible and you are eligible and choose to, you can mark your securities or commodities on the last business day of the year. Any gain or loss would be ordinary income, and gains too. An advantage would be that the tedious process of tracking the date and time you acquired each crypto and identifying the crypto you sold would not be necessary.

For most people, this election, if available, will probably not make sense, but as with so much else in the crypto tax world, much is uncertain. In the past, some declines in crypto value have been referred to as a “flash crash,” an event in electronic securities markets where the withdrawal of stock orders quickly amplifies price declines and then quickly recovers. In the case of stocks, the SEC voted on June 10, 2010 to enact rules to automatically halt trading in any S&P 500 stock that changes in price by more than 10% in a five-minute period.

A stop-loss order instructs a broker to sell at the best available price if the stock reaches a specified price. Some people use the same idea with crypto. Some even want to redeem the crypto after a sale, and with crypto you can do that. In contrast, with stocks, there are fictitious sell rules, which limit the selling (to trigger losses) and redemption of stocks within 30 days. There are no wash-sell rules for crypto, so you can sell your crypto and buy it back immediately without a 30-day waiting period.

This article is for general informational purposes and is not intended to be and should not be considered legal advice.

The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Robert W. Wood is a tax attorney representing clients worldwide from Wood LLP’s office in San Francisco, where he is a managing partner. He is the author of numerous tax books and writes frequently on taxes for Forbes, Tax Notes and other publications.


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