Transactions involving the borrowing and lending of units of virtual currency (or crypto loans) are increasing in number and type. Lacking Treasury or IRS guidance with respect to crypto loans, potential tax issues that arise from these transactions must be analyzed and understood in accordance with broad, general tax principles established by case law and based on government guidance developed in other tax areas.
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.
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