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A loophole in U.S. tax legislation could allow qualified bitcoin traders to write off unlimited losses from their trading activities, according to an expert from the cryptocurrency platform Coin Tracker.
Traders, defined by the US tax agency’s Internal Revenue Service (IRS) as persons who operate substantially, regularly and continuously, can deduct a maximum capital loss of $ 3,000 per year. Excess losses are carried over indefinitely into future years.
However, Coin Tracker Head of Tax Strategy Shehan Chandrasekera demonstrates in a recent Forbes column that cryptocurrency traders can use a fiscal election called “475 (f) election” to exceed the predefined limit in a single year.
“The good news is that the 475 (f) election allows traders to deduct cryptocurrency losses without being subject to the $ 3,000 annual limit,” notes Chandrasekera. By activating the election, traders can also write off unrealized losses at the end of the year “leading to potential tax savings,” the accountant added.
Individuals who want to benefit from this specific tax exemption must apply to the IRS within 75 days of the start of the year in which they intend to operate as such. Traders currently pay taxes on profits generated by buying and selling BTC.
The downside is that those who qualify for the election are subject to “a higher ordinary income tax rate than the long-term capital gains tax rates paid by casual investors.” Merchants are also required to pay the higher tax rate for any unrealized gains at the end of the year.
Chandrasekera warns that the applicability of the 475 (f) tax election to cryptocurrency is not straightforward as it is only applicable when it comes to “stocks” and “commodities”. The IRS defines cryptocurrencies as “ownership”, leaving the applicability of the election unclear for bitcoin traders.
“That said, bitcoin and some crypto derivatives are treated as ‘commodities’ by the Commodity Futures Trading Commission (CFTC), so the election of 475 (f) for these instruments is much clearer than other instruments,” explains Chandrasekera. .
The definition is pending. The American Institute of Certified Professional Accountants argues that the IRS makes the election applicable to cryptocurrency traders and stakeholders.
What do you think of the 475 (f) fiscal elections? Let us know in the comments section below.
Image credits: Shutterstock, Pixabay, Wiki Commons
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