Researchers at Indiana University and the University of Maine published a report assessing the state of cryptocurrency tax legislation in the US.
The study ends with suggestions for the Internal Revenue Service (IRS) that, if followed, would stop taxpayers from comparing cryptocurrency losses to traditional capital gains.
The “Crypto Losses” study aims to identify the various losses that organizations and people who invest in cryptocurrencies may incur and suggests a “new tax framework.”
The IRS’s current policies on cryptocurrencies are unclear. The experts note that cryptocurrency losses generally adhere to the same tax laws as conventional capital assets.
Typically, they are deductible against capital gains (but not against other gains like income), but there are some restrictions on when and how much they can be deducted.
Limitations would apply to deductions for cryptocurrency losses that result from particular situations classified as “sale” or “exchange,” for example.
Taxpayers could deduct all losses in other circumstances, such as when cryptocurrency is stolen, or owners abandon their possessions (by setting them afire or using another destructive method).
This is based on details from IRS Publication 551:
“Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments.”
Losses from cryptocurrencies should be governed differently from losses from conventional capital assets, according to academics.
The first assertion in their research is that by providing a deduction against capital gains, “the government is essentially sharing in the risk created by the investors’ activities.”
They argue for creating a new tax system where Bitcoin losses can only be written off against cryptocurrency gains.
The researchers concluded that “losses from one type of activity should not be used to offset or shelter income from another activity.”
This essentially says cryptocurrency shouldn’t be eligible for other capital gains deduction.
The researchers concede that other capital losses do not receive the same treatment, noting that at the moment, a “loss from the sale or exchange of any capital asset can offset gain from the sale or exchange of any other capital asset.”
The authors argue that by sharing risks with cryptocurrency investors by providing loss deductions on capital gains, the government may be limiting the economy and damaging the cryptocurrency sector, which is why cryptocurrency losses shouldn’t be given the same taxes consideration:
“This risk-sharing can encourage investment in cryptocurrency and away from other investment activities of valuable economic significance. Risk sharing can also encourage investors to suddenly exit the crypto industry, which can harm legitimate exchanges and remaining investors.”
Although the conclusion appears subjective, the authors acknowledge that preventing taxpayers from applying cryptocurrency losses to other capital gains may hurt investors who, under the current tax law, would otherwise be entitled to the same tax relief and recovery as those suffering comparable asset losses unrelated to cryptocurrencies.
