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OldManWinter

Theoretical Tax Scenario (US version)

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While this scenario does not apply to me personally (thank goodness), I've been wondering this scenario for those who bought in XRP when it was much higher.  I'm assuming that we have finally bottomed out with XRP and now are on a more or less upward trajectory for the rest of the year.

Here's the question:

If you bought 1000 XRP at ATH ($3.80) and decided to sell your XRP today at $0.55 and then immediately buy the 1000 XRP and hodl them the rest of the year.  Do you get to write off with the IRS a loss of $3.25 (or $3,250) with the IRS?  I ask this question because I've read that the IRS expects you to report any gains you make for day trading XRP even if you do not convert it to fiat.  So, does the opposite apply?  Is this a good strategy for those who have bought in at much higher levels?  At a 25% tax rate, that would translate into an extra ~$800 less in taxes you would have to pay.  That kind of money appears to me to be very significant.

I am by no means a tax expert so that is why I ask the question.  I am curious to see what others have to say.

 

 

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2 minutes ago, BiffTannen said:

Assuming that crypto is treated the same as securities in regards to taxes, this would be considered a wash sale and you would get no benefit from the loss. i believe you would have to wait 30 days to repurchase in order to benefit from the loss. 

That makes sense.  Would that same be true if you sold your XRP for BTC?  Would that be considered a wash sale too? 

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6 minutes ago, OldManWinter said:

That makes sense.  Would that same be true if you sold your XRP for BTC?  Would that be considered a wash sale too? 

I'm not too sure but I think at this point the IRS would probably consider any crypto as "substantially identical", which would mean the loss is still disallowed. What you would be able to do is take the loss and add it to your cost basis though. This will give you a tax benefit for when you do sell at a profit. 

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I'm no tax expert either, but my understanding is that all cryptos are treated as commodities for tax purposes. Buying a crypto with USD doesn't create a tax event. Selling crypto for fiat creates a tax event on gains or losses. Selling one crypto to buy a different crypto *does* create a tax event based on the USD value of both at the time of the transaction. So going through Shapeshift, for example, to convert BTC to XRP, requires you to record the BTC and XRP price when the transaction happens. If the BTC is converted within a minute or less, the tax event should be pretty small, but it still requires price records. That's why I now only buy XRP with fiat: there's no tax event with PITA record keeping.

I don't know if the 30 day waiting period is required for commodities as well as securities. I'll have to find out about that.

Now I'm just as confused as @OldManWinter. Can someone more familiar with crypto tax events post links to official IRS statements? TIA

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1 hour ago, hgdeathstroke said:

Crypto is regarded as a commodity in terms of tax in USA. So, yes can get the deduction for the year. It is not a wash sale

This is from IRS Notice 2014-21. As a taxpayer we are holding crypto as a capital asset, which would yield capital gains/losses.

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Alright, let's get some things clear: 

  • The IRS treats virtual currencies as property, so is reported as capital assets, and does not have an as-like clause.
  • All exchanges of virtual currency count as taxable events.  This includes XRP to Fiat, XRP to BTC, or XRP for some other good or service
  • You can deduct any amount of capital losses against losses of the same type (short term gains/losses, long term gains losses), but can only deduct up to $3,000 of a loss against the other type
  • The IRS has a wash rule, which means you have to wait 31 days before buying the same security if you want to claim a capital loss.  You can circumvent this by buying a similar (but not exactly the same) security, like ETH or BTC instead of XRP.
  • Losses from wash sales (XRP sold then XRP bought again, within 61 days) are deferred until the new XRP is sold

So, in your example, the IRS would say you would be able to report a capital loss of $2,700.  That's the $3,250 loss you had, minus the 1000 XRP ($550) that's exempted due to the wash.  When you eventually sell, you could deduct that $550 capital loss then.

If you didn't purchase that XRP again, you would be able to report $3,000 (the max allowed by the IRS) from other income on your tax return.

 

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To follow-up.  From the article, you will need to think twice if you plan on claiming a lose because of crypto.  I got the impression from CNBC that the IRS will come after your previous years returns to make sure you claimed any and all crypto gains you may have had. 

To me, that appears to be a threat from the IRS to scare people who have suffered crypto losses to not report them.  If you do claim a crypto loss, be prepared to be audited.  :hunter:

"There are very few places more dangerous than being between the government and their money" :hang2:

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Ultimately, it won't matter because when the your crypto goes back up, you will then need to repay those losses because you will have gains from when you bought at $0.55. It's always better to hold long term if you can (>1yr). If you are just going to buy back, I don't think it's worth the headache of claiming losses. However if you are trading the highs/lows, those gains and losses will contribute to the amount of taxes you owe.

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