Selling Cryptocurrency to Lower Taxes?
With the IRS and the Treasury Department seeking to clamp down on cryptocurrency transactions to close the tax gap, investors need to be careful about claiming losses when selling their virtual currencies.
Some investors, for example, may have taken advantage of Bitcoin's drop to less than $ 30,000 last month, from more than $ 60,000 in April, to practice "collecting tax losses" - selling an investment as crypto for the loss to end. to offset taxable capital gains.
They could have done this because the IRS classifies virtual currencies as property or assets rather than stocks or bonds.
This means that losses in cryptocurrencies are treated differently than losses in stocks, where so-called settlement rules are apply clearly.
A laundering sale occurs when investors sell stocks or bonds at a loss and buy the same 30 days before or after the sale date.
If this happens, they are not allowed to deduct the lost income. Instead, they add the loss to the basis of the new purchase, effectively increasing the price of the new stocks or bonds, and use the original purchase date for the transaction.
(If you had an asset for one year, for example, but sold it at a loss and bought it back less than 30 days later, the new purchase would be considered held for more than one year, allowing you to pay a tax rate on the gains) . of less capital in the long term.)
The over-the-counter rule is intended to prevent people from selling bonds for any reason other than to generate losses that could be used to reduce their taxable income.
Before the law took effect in 1954, investors could sell a stock at a loss and then come back and buy it right away, effectively curbing the loss to reduce their taxes.
The tax law that "governs sales laundering does not mention anything about 'ownership'. It only talks about stocks and bonds," said Shehan Chandrasekera, head of tax strategy at CoinTracker, which makes tools to help crypto investors, by email. . "We see crypto investors using this strategy to reap losses in crypto."
If the IRS does not consider a sale a laundering sale, investors can legally reap, or collect, these losses to offset any taxable capital gains, thereby reducing their tax liability.
This may be what some crypto holders expected to happen this year if they sell their virtual currencies at a loss.
However, with the threat of a crypto crackdown in Washington, there is no guarantee that the status quo will continue.
Some people may be avoiding taxes by transferring assets to the crypto economy, Treasury officials wrote in May. The IRS even adjusted its cryptocurrency issuance last month on top of its preliminary 1040 tax form for 2021 to make it clear that it wants to tax cryptocurrency transactions.
The rules may change
Technically, it is true that cryptocurrency is not a stock or a security. However, some accountants caution that there is enough ambiguity that going forward, the IRS could argue that cryptocurrency transactions should be treated like stocks or bonds for tax purposes.
"The IRS has argued, and the courts have agreed, that other types of investments are subject to settlement rules, even if they technically do not meet that definition," said Paul Beecy, New England tax partner and principal tax practice at Grant Thornton. . LLP.
For example, Treasury bills are bonds, and therefore Treasury futures, because bond futures products are considered both bonds and futures products, according to the Commodity Futures Trading Commission.
Futures fall under the laundering rule because they are agreements to buy or sell a particular asset or basic security at a predetermined price at a specific time in the future, Beecy said.
The IRS could also make other arguments to tax cryptocurrency transactions, Beecy said. "The IRS often reviews a series of rules created by case law and other guidelines to examine the content of the transaction," he said. "He could look and ask, 'Was there an economic consequence for the loss?' And if the answer is, 'No, not really,' then the IRS could argue that you should not bear the loss ”and deny your attempt to obtain a loss.
For example, let's say you buy Bitcoin for $ 60,000, Beecy said. At the end of the year, he sells it for $ 40,000, absorbing a loss of $ 20,000.
But then immediately after, you buy more Bitcoin for $ 40,000. You might not think that this would be considered an easy sell, because Bitcoin is not a stock or a bond.
But the IRS may view the situation differently, asking you if you really suffered a loss of $ 20,000, or if you are in the same position you were an hour ago, questioning whether or not you suffered a real financial loss.
If this is the case, the IRS can contest your loss claim and likely win based on precedent in case law, Beecy said.
"If it's just a tax loss and not an economic loss, then you probably can't afford the loss," he said. An economic loss would require a real loss of money, not just on paper.
The safest strategy
The safest strategy may be to stay conservative with your tax and trading strategies, especially given the recent signals on cryptocurrencies from the Treasury and the IRS.
"To be safe, you can sell Bitcoin that you bought for $ 60,000 on May 1 and then sold on May 20 for $ 35,000 for a loss of $ 25,000; you would not have a tax loss asset of $ 25,000 to offset capital gains. or income, "said Pat. Larsen, CEO of tax encryption software company ZenLedger, via email.
“So you would want to wait 30 days from when you sold your Bitcoin to buy it back if you wanted to be very conservative with your taxes and operations. However, you can use the $ 35,000 from the May 20 sale to buy any other crypto, stablecoin, or publicly traded stocks. "
This would ensure that you will erase the over-the-counter rule and be able to reap the remainder of the $ 25,000 loss to use against future tax liabilities, Larsen said, noting that only losses of up to $ 3,000 annually can be deducted from income tax. . .
We hope you enjoy watching this video about Crypto and Tax
Source: Full Value Dan
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