Researchers from two universities in the United States have released a study examining the current state of cryptocurrency tax law in the country. The paper, titled “Crypto Losses,” offers recommendations for the Internal Revenue Service (IRS) to consider when regulating the tax treatment of cryptocurrency losses.

The researchers explain their framework

Cryptocurrency losses are currently taxed similarly to other capital assets, which means they are typically deductible against capital gains. However, there are certain situations where deductions may be limited or allowed in their entirety. For example, cryptocurrency losses resulting from “sale” or “exchange” may be subject to deduction limitations, while losses resulting from theft or destruction of assets may be deducted in full.

The researchers propose a new tax framework that would separate cryptocurrency losses from other capital gains deductions. They argue that the government is sharing the risk created by investors’ activities by offering a deductible against capital gains. Therefore, a new tax framework should be built where cryptocurrency losses can only be deducted from cryptocurrency gains. The researchers noted that losses recorded in an activity should not be used as a shelter for another.

While this proposal aims to prevent taxpayers from weighing crypto losses against other capital gains, the authors recognize that it could harm investors who would otherwise be entitled to the same taxation relief and recovery as those suffering similar asset losses unrelated to cryptocurrency. The researchers also acknowledge that other capital losses are not given similar treatment and that losses from the sale of an asset cannot be used to offset capital from another asset.

The framework will help the crypto market grow

The researchers contend that their proposed tax framework would prevent the government from stifling the economy and harming the cryptocurrency market. By offering loss deductions on capital gains, the government is sharing risks with cryptocurrency investors, which can discourage investment in the market. The study proposes a new tax framework that will regulate cryptocurrency losses differently from other capital assets. 

While this proposal aims to prevent taxpayers from weighing crypto losses against other capital gains, it could harm investors who would otherwise be entitled to the same taxation relief and recovery as those who suffer similar losses  not related to digital assets.The researchers recommend that the IRS consider their proposal carefully and make changes to the current tax treatment of cryptocurrency losses accordingly.