Traders in virtual currency seeking to deduct trading losses and avoid application of the capital loss limitations would want to elect into the special tax rules found at IRC § 475(f). However, such taxpayers should analyze the definitions of “securities” and “commodities,” determine whether they are eligible for either of the trader elections, and consider the federal and state tax implications of making such an election.
Special tax rules require taxpayers to treat gains on certain virtual currency positions as taxable even though they still hold their positions. These rules apply to futures and options that qualify as section 1256 contracts, which is potentially relevant to taxpayers buying, selling and holding Bitcoin futures and options, as well as Ether futures and other virtual currencies. This article reviews a number of issues that arise—or may arise in the future—for taxpayers with virtual currency positions.
Taxpayers who hold virtual currency positions may be subject to the tax straddle rules that require them to defer losses on one offsetting position to the extent of unrecognized gain on other offsetting positions. This article explores guidance (or the lack thereof) relating to actively traded personal property, offsetting positions and other issues as applied to virtual currency holdings.
Some virtual currency units and positions are treated as commodities by Commodity Futures Trading Commission (CFTC) and US courts. The IRS has told taxpayers that it views convertible virtual currency as property, not foreign currency, for federal tax purposes. Lacking clear guidance from either the Internal Revenue Service (IRS) or the Department of the Treasury, this article addresses issues that may help determine whether Internal Revenue Code provisions that apply to commodities might also apply to transactions involving virtual currencies and positions.
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