Experts Propose IRS Guidelines for Tax-Deductible Crypto Losses

The cryptocurrency sector has won significant attention recently, with many individuals and businesses investing in digital assets. However, the volatile market has led to losses for many investors.

In a recent development, tax law researchers have proposed a framework for the Internal Revenue Service (IRS) to allow taxpayers to deduct cryptocurrency losses on their tax returns. The proposed framework provides a clear and consistent approach for taxpayers to claim deductions for cryptocurrency losses.

Internal Revenue Service Framework for Crypto Deductions

The proposed framework emerged after researchers at the University of Maine and Indiana University examined current tax laws for digital currencies in the United States.

The article defines the possible losses associated with individuals and companies investing in digital currencies and proposes a framework for dealing with such events. It proposes that taxpayers should deduct digital wealth losses on their tax returns in the same way they can deduct losses from other investments, such as stocks and bonds.

However, it cited that this influence will be based on certain guidelines, noting that the loss of digital assets follows the same laws that bind other capital assets. As such, taxpayers are allowed to deduct capital gains, but not those from income. Nevertheless, there are certain differences when it comes to the amount and the time the deductions can be made.

Based on the guidelines, crypto losses incurred from exchanges and sales will have deduction limitations. On the other hand, those incurred from hacks or abandonment through events such as burning are open to a total deduction. This is evident from data from the IRS publication 551 in 409 topics.

Facts about the Internal Revenue Service Framework

The framework also guides how to calculate the value of the cryptocurrency at the time of purchase and sale, including how to determine the asset’s cost basis.

The researchers argue that a clear and consistent framework is needed to provide taxpayers with certainty and reduce the risk of errors when reporting cryptocurrency losses. They hope the tax authorities will adopt the proposed framework to provide clarity and consistency for taxpayers.

This proposal comes as the tax authorities increase their focus on cryptocurrency reporting. Moreover, in 2019, the tax authorities sent letter to over 10,000 taxpayers who are engaged in cryptocurrency transactions but may not yet have reported them on their tax returns.

The agency has too updated its tax common questions to include questions about digital asset transactions, such as identification of a specific entity for virtual assets and refund matters.

Furthermore, the researchers suggested that the regulation supporting digital currency losses should not be the same as other capital assets. They noted the digital resource loss deductions should be based on taxpayers’ cryptocurrency gains.

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