1. Bitcoin Tax Guide: An Introduction
  2. Bitcoin Tax Guide: Trading Gains And Losses - Fair Market Value
  3. Bitcoin Tax Guide: Trading Gains And Losses - Alt-Currencies
  4. Bitcoin Tax Guide: Trading Gains And Losses - LIFO, FIFO, Offsetting Lots
  5. Bitcoin Tax Guide: Trading Gains And Losses - Wash Sales: Impossible To Track?
  6. Bitcoin Tax Guide: E-commerce Taxation
  7. Bitcoin Tax Guide: Donations
  8. Bitcoin Tax Guide: Gifts And Tips
  9. Bitcoin Tax Guide: Lost Or Stolen Bitcoins

As bitcoin and cryptocurrency trading has become more popular, the number of incidents of thefts, scams, and fraudulent activity has also increased. How does the IRS deal with these situations? Unfortunately, the IRS reaction is not always beneficial to the investor who has had bitcoins go missing.

Typically, losses which apply to bitcoin are governed by Section 165 of the tax code. Individual losses are thus subject to a $100 floor and are deductible, but only to the extent that the taxpayer has a total loss for that year which is in excess of 10% of adjusted gross income. S if an investor loses $20,000 in bitcoin holdings when an exchange goes defunct, but that quantity of bitcoins also had $10,000 in realized capital gains. The investor would be entitled to claim a loss for the tax year in which he discovers the loss. Still, though, he would need to pay $1,500 in capital-gains taxes for the gains that were realized previously.

Mt. Gox, the popular cryptocurrency exchange that became defunct, caused millions of dollars of losses for investors. However, the fact that the “lost” bitcoins were, in some cases, recovered means that investors may not have been able to claim their missing coins as losses at all. The reason for this is that the IRS likely considered there to be a “reasonable chance” of recovery of the coins.

Issues with cryptocurrency exchanges become even more complicated when you consider the fact that exchanges are based all over the world. In the case of Mt. Gox, the exchange was Japanese, and it was not a fully licensed U.S. bank. Part of the appeal of the cryptocurrency industry—that it provides investors with anonymity and decentralization—also means that the taxation of those holdings can become even more complicated than it would be otherwise.

If a bitcoin holder accidentally loses or deletes the private keys that provide access to coins they mined for themselves, that holder would not be able to write off those losses.

Conclusion

The cryptocurrency space is changing all the time. Not only are there new coins and tokens, enterprising new companies making use of blockchain technology and raising funds via ICO, and new interest and applications for bitcoin and other digital currencies in the wider world, but there are also long-term implications of the cryptocurrency space which have yet to be worked out. The position of the IRS relative to bitcoin holdings is one of those questions. To sum up, the situation is far from easy and nowhere near resolved. Investors trading in bitcoin or other digital currencies would be well advised to seek out professional accounting advice before filing taxes.


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