The cryptocurrency sector has gained significant attention recently, with many individuals and businesses investing in digital assets. However, the volatile market has led many investors to losses.

In a recent development, tax law researchers have proposed a framework for the Internal Revenue Service (IRS) to allow taxpayers to deduct cryptocurrency losses on their tax returns. The proposed framework provides a clear and consistent approach for taxpayers to claim deductions on cryptocurrency losses.

Internal Revenue Service Framework For Crypto Deductions

The proposed framework surfaced following the examination of the present state of the digital currencies tax law in the U.S. by research scholars at the University of Maine and Indiana University.

The paper defines possible losses associated with individuals and businesses investing in digital currencies and suggests a framework to manage such occurrences. It suggests that taxpayers should deduct digital asset losses on their tax returns in the same way as they can deduct losses from other investments, such as stocks and bonds.

However, it cited that this leverage will be based on certain guidelines, noting that digital asset losses follow the same laws binding other capital assets. As such, taxpayers are allowed to deduct capital gains but not those from income. Still, certain distinctions exist regarding the amount and the time the deductions can occur.

Based on the guidelines, crypto losses incurred from exchange and sales will have deduction limitations. On the other hand, those incurred from hacks or abandonment through events like burning are open for a total deduction. This is seen in the data from IRS publication 551 in the 409 topics.

Facts Surrounding The Internal Revenue Service Framework

The framework also guides how to calculate the value of the cryptocurrency at the time of purchase and sale, including how to determine the asset’s cost basis.

The researchers argue that a clear and consistent framework is needed to provide taxpayers with certainty and reduce the risk of errors in reporting cryptocurrency losses. They hope the IRS will adopt the proposed framework to provide clarity and consistency for taxpayers.

This proposal comes when the IRS is increasing its focus on cryptocurrency reporting. Besides, in 2019, the IRS sent letters to over 10,000 taxpayers engaged in cryptocurrency transactions but may have yet to report them on their tax returns. 

The agency has also updated its tax FAQs to include questions about digital asset transactions, such as identifying a specific virtual assets unit and refund matters.

Further, the researchers suggested that the regulation backing digital currency losses should not be the same as other capital assets. They noted that digital asset loss deductions should be based on taxpayers’ cryptocurrency gains.

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