New Crypto Taxation Framework Proposed by Tax Law Researchers
- Tax law researchers at renowned universities released a paper titled “Crypto Losses.”
- The paper highlights the scenario of crypto losses deductions.
The United States is yet to adopt a comprehensive crypto regulation, but the taxation laws for digital assets are already in place. Recently, researchers at the University of Maine and Indiana University released a study examining the current state of tax laws regarding cryptocurrencies. The paper recommends some alterations, if applied could prevent taxpayers from weighing crypto losses against other capital gains.
The Proposed Crypto Tax Framework
The released paper is titled “Crypto Losses” and tries to define the multiple forms of losses incurred by individuals or businesses whilst investing in cryptocurrency. Also, it proposes a “new tax framework.”
Currently, the Internal Revenue Service’s guidelines regarding cryptocurrency are a bit obscure. The researchers pointed out that for the most part, the crypto losses follow the taxation rules similar to other capital assets. They are commonly deductible against capital gains but omit other gains like income. However, there are certain distinctions as to when and in what amounts these deductions might occur.
Cryptocurrency losses that are incurred from specific cases which are defined as “sale” or “exchange” would be subjected to certain deduction limitations. In other situations, like having crypto stolen or situations where the holders have abandoned their assets, either through burning or other means, the taxpayers will be allowed to deduct the losses in their entirety.
This is per the information provided in the 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.”
Researchers argue that there shall be different regulation standards for cryptocurrency losses. The initial claim made in the research is that the government is at risk created of investors’ activities as they offer a deductible against capital gains. This process could hurt them in the long run. They also suggested that in the new tax framework, the crypto losses shall only be deducted from crypto gains.
Per the researchers, “losses from one type of activity should not be used to offset or shelter income from another activity.” Basically, they are suggesting that cryptocurrency shall be disenfranchised from the deductions applied to other capital gains. They have also acknowledged the fact that other capital losses are also not treated equally.
They argue that a loss from the exchange or sale of any capital asset can be used to offset gains from the sale or exchange of any other capital asset.
Why Does Crypto Need Separate Tax Laws?
When asked about whether cryptocurrency actually needs separate taxation laws, the authors of the paper said that by sharing the risks with crypto investors by offering loss deductions on capital gains, the government might be choking the economy and could also be harming the cryptocurrency market.
This risk-sharing would deviate investments away from activities of valuable economic significance to cryptocurrency. It could also encourage a crypto investor to abruptly exit the industry, this would then harm legitimate exchanges and other investors.
The authors acknowledge that stopping taxpayers from applying crypto losses to capital gains might harm investors who, under the status quo, would have been entitled for similar tax reliefs and recovery options as those suffering similar asset losses other than cryptocurrency.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing
