New framework for crypto taxation proposed by tax law researchers
- Tax law researchers at renowned universities published an article titled “Crypto loss.”
- The paper highlights the crypto loss deduction scenario.
The US has yet to enact comprehensive crypto regulation, but the tax laws for digital assets are already in place. Recently, researchers at the University of Maine and Indiana University published a study examining current tax laws regarding cryptocurrencies. The paper recommends some changes that, if applied, could prevent taxpayers from weighing crypto losses against other capital gains.
The proposed crypto tax framework
The published paper is entitled “Crypto loss” and tries to define the many forms of loss that individuals or businesses incur while investing in cryptocurrency. It also suggests a “new tax framework”.
Currently, the Internal Revenue Service’s guidelines regarding cryptocurrency are a bit unclear. The researchers pointed out that the crypto losses mostly follow the tax rules corresponding to other capital assets. They are usually deductible against capital gains, but exclude other gains as income. However, there are certain differences in when and in what amounts these deductions can occur.
Cryptocurrency losses arising from specific cases defined as “sale” or “Exchange” would be subject to certain deduction limitations. In other situations, such as having crypto stolen or situations where the holders have abandoned their assets, either by burning or otherwise, taxpayers will receive a deduction for the losses in full.
This is according to the information provided in IRS Publication 551, as cited in Topic 409: “Almost anything you own and use for personal or investment purposes is a capital asset. Examples include a home, items for personal use such as household furniture, and stocks or bonds held as investments.”
Researchers argue that there should be different regulatory standards for cryptocurrency losses. The first claim made in the research is that the authorities are at risk for the investors’ activities as they offer a deductible against capital gains. This process can harm them in the long run. They also suggested that in the new tax framework the crypto losses should only be deducted from the crypto gain.
According to the researchers, “Loss from one type of activity shall not be used to offset or protect income from another activity.” Basically, they propose that cryptocurrency should be exempt from the deductions used on other capital gains. They have also acknowledged that other course losses are not treated equally either.
They argue that a loss from the exchange or sale of any asset can be used to offset gains from the sale or exchange of any other asset.
Why does crypto need separate tax laws?
When asked whether cryptocurrency actually needs separate tax laws, the authors of the paper said that by sharing the risk with crypto investors by offering capital gains tax deductions, the government could stifle the economy and could also harm the cryptocurrency market.
This risk sharing will deviate investments from activities of valuable financial importance to cryptocurrency. It could also encourage a crypto investor to leave the industry abruptly, which would then harm legitimate exchanges and other investors.
The authors acknowledge that stopping taxpayers from using crypto losses against capital gains could harm investors who, under the status quo, would have been entitled to similar tax breaks and recovery options as those suffering similar non-cryptocurrency losses.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while graduating. A keen observer of detail, he shares his passion for writing alongside being a developer. His backend knowledge of blockchain helps him bring a unique perspective to his writing
