Can We Discern Tax Opportunities From the Haze of the Crypto Horizon?
By: Randall P. Andreozzi, Esq.
While we anxiously await Treasury Department guidance on cryptocurrency (See, TIGTA Report of September 24, 2020, “The Internal Revenue Service Can Improve Taxpayer Compliance for Virtual Currency Transactions”), events, good and bad, continue to arise that create tax planning and management opportunities for investors. Take, for example, Bitcoin’s recent dive from its high of some $64,000 to a low of $30,000. Can investors capture the loss for tax purposes while still maintaining their desired positions in the commodity?
The wash sale rules – which preclude loss realizations on the sale of a security if the taxpayer repurchases that same security or one substantially similar within 30 days – would suggest the answer is no. But, the wash sale rules apply to securities. And one thing we do know from IRS guidance is that IRS treats crypto not as a security but, rather, as property.
The distinction suggests that, in theory and under current law, an investor could realize the loss by selling the cryptocurrency and use that loss to offset another capital gain. The investor could then buy the same type of cryptocurrency or another to re-establish the desired investment position.
But, alas, nothing is without caveat in this murky realm. And here are a few. First, the property/security distinction disappears and the wash sale rules resurface if the investor is holding the cryptocurrency through an actual security like Coinbase. Second, the repurchase would have to be arms-length, such that the IRS could not suggest that the sale/buyback lacked economic substance. One would think that time would be the balm for this hazard – the longer one waits to buy back the more economic substance exists. But, we can never be assured whether and to what extent the IRS would buy that notion. And, the more economic substance exists, the more the investor bears the risk of market volatility – a risk that may outweigh the tax benefits realized. And, third, Treasury could always come forward and close off this avenue with published guidance.
So, for now, the best solution is to apply established tax principles to these new and complex events, trust that the IRS will provided consistent guidance, and stay tuned to this channel…..
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