Encryption cycles are nerve-wracking and may not be over yet. The turmoil could make cryptocurrency investors and cryptocurrency companies less interested than when prices ever seemed to be climbing. With the market falling off a cliff, a huge loss will be demanded from your taxes, right? Not necessarily. When your US dollars are shaking in the digital world, it’s worth asking if there’s any lemonade you can make by claiming a loss on your taxes.
First, ask what happened from a tax point of view. If you’ve been in business and started a large taxable profit, but then the floor falls out, first consider whether you can pay your taxes for the profit you have already earned this year. Taxes are annual and generally based on calendar years unless you have chosen otherwise. Start with the suggestion that every time you sell or exchange a cryptocurrency for cash, another cryptocurrency or for goods or services, the transaction is considered a taxable event.
This is a result of the US Treasury Department’s shot that was heard worldwide in the 2014-21 announcement when the IRS announced that cryptocurrencies were a property for tax purposes. Not currency, not securities, but assets, so most all transactions mean the IRS wants you to report profits or losses.
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For 2018, many cryptocurrency investors argued that cryptocurrency trading was tax-free. But this argument was based on Chapter 1031 of the Tax Code. It was a good argument, depending on the facts and news coverage. But this argument went away as of 2018. Section 1031 of the Tax Code states that this only applies to the exchange of real estate.
The IRS is reviewing some crypto-taxpayers for 2018 and, so far, does not seem to agree with the 1031 argument, even for 2018. The IRS even issued a single guideline that tax-free cryptocurrencies do not work. We may need a court case to resolve it if the IRS pushes it so far. After all, this only applies to 2017 and previous years, so it matters less.
But regardless of whether you use cryptocurrencies to pay someone, exchange cryptocurrencies or sell them directly, do you have a profit or a loss? For most people, profits or losses would depend on short-term or long-term gains / losses based on (what you paid for the cryptocurrency), the holding period and the price at which the cryptocurrency was sold or exchanged. However, some people may make a regular profit or loss and that topic is worth reviewing. Do you trade in cryptocurrencies as a company?
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Most investors want long-term profit growth if they buy and hold for more than a year. However, regular income therapy may be beneficial for some, at least for losses. Stockbrokers can make 475 shares of market terms according to the tax code, but does it work for cryptocurrencies? It’s not clear. To be eligible, one must claim that the cryptocurrency is securities or goods.
The US Securities and Exchange Commission has argued that some cryptocurrencies are securities and could be a pretext for product description as well. It is at least worth considering in some cases. However, in addition to conveying the view that digital currency is a security or commodity, you would need to be eligible as a trader to make marketable terms. Whether a person’s business involves “business” instead of “investment” is a key factor in determining whether one is qualified to make market terms.
The IRS lists who the trader is, usually characterized by large volumes and short-term assets, although sometimes investments and trades may look more similar.
If crypto proves to be eligible for mark-to-market and if you meet the criteria and choose it, you could check to market your securities or commodities on the last trading day of the year. Any gain or loss would be ordinary income and profit too. The benefit would be that there was no need for the cumbersome process of tracking the date and time each cryptocurrency was acquired and identifying the cryptocurrency you sold.
For most people, these elections, if they are available, will probably make no sense, but as with so much else in the cryptocurrency world, many things are uncertain. In the past, some declines in cryptocurrencies have been called “flash crashes”, an event in electronic securities markets where the withdrawal of stock orders increases rapidly and then recovers quickly. In the case of equities, the SEC voted on June 10, 2010 to set rules to automatically suspend trading in any stock in the S&P 500 as their price changes by more than 10% over any five-minute period.
A stop order directs a broker to sell at the best price available if the item reaches a certain price. Some people use the same idea with cryptography. Some even want to buy the code back after the sale and with the code you can do that. On the other hand, with stocks, there are rules on laundry sales, which limit sales (to trigger losses) and repurchases in stock within 30 days. There are no cryptocurrency clearance rules, so you can resell your cryptocurrency and buy it back immediately without a 30-day waiting period.
This article is for general information purposes only and should not be construed as legal advice.
The views, thoughts and opinions expressed herein are the sole responsibility of the authors and do not necessarily reflect or represent the views and opinions of the Cointelegraph.
Robert W. Wood is a tax lawyer representing clients around the world from Wood LLP’s office in San Francisco, where he is the CEO. He is the author of numerous tax books and often writes about taxes for Forbes, Tax Notes and other publications.
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