A newly issued study appears to endorse the isolation of crypto assets from other tax deductions where losses are concerned.
Researchers at Indiana University and the University of Maine newly issued a study examining the current state of cryptocurrency tax law in the United States. The exploration concludes with recommendations for the Internal Revenue Service (IRS) that, if adopted, would prevent taxpayers from weighing crypto losses against different capital gains.
The paper, dubbed simply “ Crypto Losses, ” seeks to define the various forms of loss that can be accrued by companies and individualities invested in cryptocurrency and propose a “ new tax frame. ”
Current IRS guidelines concerning cryptocurrency are more or less nebulous. For the utmost part, as the researchers point out, cryptocurrency losses tend to succeed the same taxation regulations as other capital assets. They’re generally deductible against capital gains (but not other gains similar to income), but there are some distinctions as to when and in what amounts deductions may do.
Related: New tax rules could mean a US Exodus for crypto companies
Cryptocurrency losses that accrue from specific cases defined as “ sale ” or “ exchange, ” for example, would be subject to deduction limitations. Still, in other situations, similar to having crypto stolen or instances where holders abandon their assets (through burning or different destructive means), taxpayers could deduct the losses in their entirety.
This is based on the data provided in IRS publication 551, as cited in topic 409:
“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.”
According to the researchers, cryptocurrency losses should be regulated other than other capital assets. The first claim made in their research is that “ the government is basically participating in the threat created by the investors ’ activities ” by giving a deductible against capital gains.
Their argument concludes that a new tax frame should be built wherein crypto losses may only be deducted from crypto gains.
According to the researchers, “ losses from one kind of exercise shouldn't be used to offset or shelter income from another activity ” Basically, this suggests that cryptocurrency should be disenfranchised from different capital gains deductions.
Still, the researchers admit that different capital losses aren't presented in such treatment, stating that, presently, a “ loss from the sale or exchange of any capital asset can offset gain from the sale or exchange of any different capital asset."
As to why cryptocurrency losses shouldn’t be presented the equal taxation consideration, the authors state that by participating threats with cryptocurrency investors in offering loss deductions on capital gains, the government may be stifling the economy and harming the cryptocurrency market:
“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."
Despite the apparently subjective conclusion, the authors admit that preventing taxpayers from referring cryptocurrency losses to different capital gains could harm investors who, under the status quo, would else be entitled to the same taxation relief and recovery as those suffering such asset losses unrelated to cryptocurrency.
(TRISTAN GREENE, Cointelegraph, 2023)