At this point in the agency’s 155-year history, the Internal Revenue Service has seen every trick in the book investors use to avoid tax liability. In the past, crafty traders would try to generate a capital loss that existed on paper, but not in their actual portfolios. One such transaction is known as a “wash sale,” and it is prohibited by Section 1091 of the Internal Revenue Code. But does this prohibition apply to cryptocurrency traders as well?
Taking deductions you’re not entitled to won’t save you money. Instead, it will earn you a quick trip to the auditor’s desk. Even unintentional inaccuracies on your tax return can land you in big trouble with the IRS, so play it safe and consult a professional this tax season. Even if you’re used to self-preparing your taxes, you should think twice before going at it alone this year – especially if you’re involved in cryptocurrency trading.
Investors are just now figuring out how to report their cryptocurrency gains and losses to the Internal Revenue Service (“IRS”), and a trained professional can help you get on the right track. Happy Tax professionals focus on the particular needs of cryptocurrency investors. As a Happy Tax customer, you will have the opportunity to work with an experienced Certified Public Accountants(“CPA”). These licensed professionals stay current on the laws and policies affecting virtual currency investments, and you may be surprised at what even the most seasoned crypto investors don’t know when it comes to taxes.
Wash Sales of Stocks or Securities
An investor is entitled to a tax deduction for any capital loss he or she accumulates in a given year. Typically, selling a stock or security at a lower price than you bought it for qualifies as a capital loss. That is, however, unless you repurchase the same stock or security within 30 days. These sorts of sales are considered wash sales, and they are excluded from the capital loss deduction allowance.
Wash sales are banned because the loss only exists on the books, not in the investor’s portfolio. Consider an example: an investor buys 100 shares of stock at $10 each, and then sells them when the market drops and the stock price slips to $5. At first glance, this seems to create a capital loss of $500 that the investor can deduct from her taxes. However, assume the investor re-purchases 100 shares of the same stock a few days later when the market is still down, paying $5 per share. This puts the investor in the same position that she was in before the sale that caused the $500 capital loss. To prevent investors from using down markets to accumulate tax deductions on money they didn’t actually use, the IRS does not allow any deduction in these circumstances.
The wash sale rule exists to prevent investors from getting tax breaks on artificial losses. However, under the tax code, the prohibition only applies to “any sale or other disposition of shares of stock or securities.” So, on its face, the wash sale rule only applies to common stocks, options, and convertible securities. But how does this apply to cryptocurrency investments?
IRS Considers Crypto Assets Property, Not Securities
Cryptocurrencies are an entirely new type of financial asset, and the IRS has struggled to figure out exactly how they fit into the existing tax code. In 2014, the agency issued a policy notice declaring that Bitcoin and other virtual currencies are taxable as property, not securities or traditional currency. So, like other types of real and intangible property, cryptocurrencies are subject to the capital gains rules. These rules apply to taxpayers who buy and sell cryptocurrencies for investment purposes, as well as people who spend virtual currencies on goods and services. Like other capital assets, if your capital losses on your cryptocurrency investments exceed your capital gains, you can claim the loss as a deduction on your income tax returns up to $3,000.
Wash Sale Rule Does Not Apply to Cryptocurrency – For Now
Cryptocurrency markets have been slipping in the beginning of the year, and some investors may be seeing losses as a result. But, if you sell your cryptocurrency holdings for a loss today, and then re-purchase them at near the same price tomorrow, can you claim a deduction without running afoul of the wash sale rule? The IRS has remained mum on the issue, but most experts agree that you can indeed.
As it stands, Section 1091 does not apply to Bitcoin or other cryptocurrencies. Because the IRS treats these assets as property, they do not fall within the strict statutory prohibition on wash sales of stock or securities. Because the wash sale rule does not apply based on the express language of the statute, crypto investors can probably claim capital losses from coins they sold and repurchased within 30 days.
However, this may not be the case for long. Section 1091 does allow the IRS to expand the “stock or securities” that trigger the wash sale rule. If the IRS passes a regulation clarifying that Bitcoin and other cryptocurrencies do fall under the jurisdiction of Section 1091, wash sales may be disallowed forever.
When in Doubt, Call a Professional
Cryptocurrency investors are dealing with a great deal of uncertainty regarding how the IRS will treat virtual currency investments in the future. However, one thing is clear – the agency is coming after the cryptocurrency community for its due. In fact, the IRS is actively pursuing investors who made money on cryptocurrency exchanges as far back as 2013, so don’t think you’re off the hook for prior years’ non-disclosures. The IRS recently filed against the largest Bitcoin exchange in the U.S. seeking information on possible tax evaders. These unfortunate individuals will most likely be facing an audit any day now, including all of the fees and penalties that come with it.
If you have a virtual currency wallet, you should be prepared to report your cryptocurrency transactions on your tax returns this year. Failing to report cryptocurrency income or claiming deductions from losses you are not entitled to can put you at odds with the IRS. Avoid the hassle by contacting a qualified cryptocurrency accountant who can work with you this tax season. If you don’t have a regular tax professional, or if you think your usual advisor isn’t up-to-date on the rules and regulations that apply to cryptocurrency investors, don’t fret! Happy Tax can connect you with a skilled cryptocurrency accountant in your area through their easy-to-use mobile app. If you’re stressed out about taxes this year, download the app and see what Happy Tax can do for you.