Researchers from Indiana University and the University of Maine have recently published a study examining the current state of US cryptocurrency tax law. The investigation concludes with recommendations for the IRS that, if adopted, would prevent taxpayers from weighing cryptocurrency losses against other capital gains.
The document, called simply “Crypto Losses”, youIt tries to define the various forms of loss that companies and individuals who invest in cryptocurrencies can accumulate and proposes a “new tax framework.”
The current IRS guidelines regarding cryptocurrencies are somewhat nebulous. For the most part, as the researchers point out, losses from cryptocurrency tend to follow the same tax rules as other capital assets. They are normally deductible from capital gains (but not from other gains such as income), but there are some distinctions as to when and to what amounts deductions may occur.
Cryptocurrency losses that occur in specific cases defined as “sale” or “conversion”, for example, would be subject to deduction limitations. However, in other situations, such as cryptocurrency theft or cases where holders abandon their assets (through burning or other destructive means), taxpayers may be able to deduct losses in full.
It is based on information provided in IRS publication 551, cited in topic 409:
“Almost anything you own and use for personal or investment purposes is a fixed asset. For example, a home, personal use items like household furniture, and stocks or bonds held as an investment.”
According to the researchers, Cryptocurrency losses should be regulated differently than other capital assets. The initial claim of his research is that “the government is essentially sharing the risk created by the activities of investors” by offering a deductible against capital gains.
Their argument concludes that a new tax framework should be created in which cryptocurrency losses can only be deducted from cryptocurrency capital gains.
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According to the researchers, “Losses from one type of activity must not be used to offset or disguise income from another activity.” Essentially, this suggests that cryptocurrencies should be excluded from other capital gains deductions.
However, the researchers acknowledge that other capital losses do not receive similar treatment, stating that currently a “loss on the sale or conversion of any capital asset may offset the gain on the sale or conversion of any other capital asset.”
As to why cryptocurrency losses should not receive the same tax consideration, the authors state that By sharing risk with cryptocurrency investors by offering loss deductions on capital gains, the government may be stifling the economy and hurting the cryptocurrency market:
“This risk-sharing can encourage investment in cryptocurrency and steer it away from other investment activities of valuable economic importance. Risk-sharing can also encourage investors to suddenly leave the cryptocurrency industry, which can harm legitimate exchanges already the remaining investors.
Despite the seemingly subjective conclusion, the authors acknowledge that preventing taxpayers from applying cryptocurrency losses to other capital gains could harm investors who, under the status quo, would otherwise be entitled to the same tax relief and recovery. than those who suffer losses of similar non-cryptocurrency assets.
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