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.
Taxpayers who enter into offsetting positions in actively traded personal property where one or more—but not all—of the positions making up a straddle are taxed as section 1256 contracts (while another offsetting position is not a section 1256 contract) are subject to the mixed straddle rules. Potential adverse consequences can be magnified or made more complex by application of these special rules. This article can help taxpayers understand and take action to minimize or avoid these consequences when such positions involve virtual currencies.
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.
Under the wash sales rule, taxpayers cannot deduct a loss on the sale of stock or securities if the taxpayer purchases the same or substantially similar assets a short time before or after the sale that triggered the loss. This article examines possible application of the wash sales rule to virtual currencies.
Virtual currencies are not currently accepted as the legal tender or “fiat” currency of any country. In the United States, the IRS has stated its view that convertible virtual currency is property, subject to the general tax rules that apply to property, and is not foreign currency. As such, virtual currency does not qualify for the special tax rules available to foreign currency transactions. This article explores the major consequences of this rule on taxpayers.
Some virtual currency units and positions are treated as securities by the Securities and Exchange Commission (SEC) and US courts. The Internal Revenue Service (IRS), however, has told taxpayers that it views convertible virtual currency as property, not foreign currency, for federal tax purposes. Lacking clear guidance from the IRS or the Department of the Treasury, this article addresses issues that may help determine whether Internal Revenue Code provisions that apply to securities might also apply to transactions involving virtual currencies and positions.
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.
If a taxpayer’s virtual currency activities are too infrequent to rise to the level of investment activities or do not qualify as trader or dealer activities, losses associated with virtual currency transactions are not deductible. This article explores tax-law issues that arise in the context of “personal use virtual currency” and reminds taxpayers to be aware of both their intent when acquiring or holding virtual currency and the potential tax implications arising from such activities.
The Internal Revenue Service (IRS) views convertible virtual currency as property, not foreign currency. As such, taxpayers must record and track the tax basis of each unit of virtual currency held in order to properly report taxable gain or loss when disposing of a unit or units of virtual currency. This article reviews the IRS’s position with respect to the identification and tax basis of such units.
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