“A loophole in the U.S. tax law could allow qualified bitcoin traders to write off unlimited losses from their trading activities, according to an expert from crypto tax platform Coin Tracker.”
Traders, defined by U.S tax collection agency Internal Revenue Service (IRS) as people who trade substantially, regularly and continuously, are allowed a maximum capital loss deduction of $3,000 per year. Excess losses are indefinitely carried into future years.
However, Coin Tracker head of tax strategy Shehan Chandrasekera demonstrates in a recent Forbes column that cryptocurrency traders can use a tax election called the “475(f) election” to go beyond the default limit in any single year.
“The good news is that the 475(f) election allows traders to deduct crypto trading losses without being subject to the $3,000 annual limit,” Chandrasekera notes. By activating the election, traders can also write off unrealized losses at the end of the year “leading to potential tax savings”, the accountant adds.
Individuals who want to benefit from this specific tax dispensation should apply to the IRS within 75 days from the start of the year they intend to operate as such. Traders currently pay taxes on profits generated from buying and selling BTC.
The disadvantage is that those who qualify for the election are subject to “a higher ordinary income tax rate compared to the long term capital gain tax rates that casual investors pay.” Traders are also required to pay the higher tax rate for any unrealized gains at year end.
Chandrasekera warns that the applicability of 475(f) tax election to cryptocurrency is not straightforward as it is only applicable when one deals with “securities” and “commodities.” IRS defines cryptocurrencies as “property”, leaving the applicability of the election for bitcoin traders unclear.
“With that said, bitcoin and some crypto derivatives are treated as “commodities” by the Commodity Futures Trading Commission (CFTC) so 475(f) election for those instruments is much clearer than other instruments,” Chandrasekera explains.
Clarity on the definition is pending. The American Institute of Certified Professional Accountants advocates that IRS make the election applicable to crypto traders and relevant parties.