With the end of the year approaching, crypto investors have some planning to do. It’s typically a time for businesses to buy up tax-deductible expenses, pumping up their losses to take the sting out of taxes in April. But for crypto investors, the rules are still pretty unclear.
“first and only guidance on how tax principles apply to transactions using cryptocurrency.”
What Crypto Looks Like to the IRS
We do know that crypto assets are considered “property” and not currency, for tax purposes. If you bought bitcoin and didn’t sell, you have no gains or losses to report. Coin-to-coin trades are generally considered taxable events. Beyond that, things are less than clear.
Tax attorney and founder of Attorney IO Alexander Stern says:
“Bitcoin looks a lot more like a commodity. The latest ICO often looks a lot more like a security… Ultimately, one token could be regulated as both a security and a commodity.”
While people have been trying to figure out how to fulfill tax obligations regarding crypto, a strange loophole has appeared that’s allowing some investors to buy up crypto assets and count them as business losses.
Andrew Rossow, attorney and cryptocurrency contributor for Forbes says:
“From a legal perspective, we are watching regulatory agencies and institutions try to unpack the complexities of digital assets… With each ruling or advisory opinion, we are starting to see the molding of ‘boundaries’ on a scale that is still developing and expanding outward.”
Here’s What Happened
The Pareto Network is an investment research platform that offers a subscription package for premium-level investors. Those who qualify for the platform’s subscription services do so based on a score, and investors can build up their scores by accumulating tokens native to the platform, called PARETO.
Any money you put towards these tokens qualifies as a business loss, as it’s paying for the expense of the subscription service. You can deduct all that money as losses, and you still have your tokens as assets since you don’t need to spend them to access the research platform.
PARETO tokens have a market value and can be subsequently traded on various markets. Rossow continues:
“I’m not a tax expert, but I’ve always said that we’re all in this together as we define systems related to blockchain technology. What we are witnessing here are use cases, some inadvertently, as indicated here, and watching how they fit within the legal, tax, and ethical boundaries of what we know to be well-founded today.”
Through the way the Pareto Network set up their subscription package, they accidentally created a tax-deductible asset, allowing investors to buy up crypto assets and classify them as losses.
Crypto Investors – Keep Your Transaction Volume Low
Building up losses can be a powerful way to ease your tax burden and reinforce your business. But there are other strategies to keep your crypto more lightly taxed.
Take the advice of Patrick Camuso, a CPA with a special focus on crypto. He says that investors dealing in fewer transactions will have a much easier situation come tax time. On the other hand:
“when you have a high volume of trades, it does create a compliance burden… Day traders and algorithmic traders usually have the most unpleasant time around tax season from my experiences so far.”
He notes that when the value of your coin goes up and down, it’s not important for tax purposes. But when you trade it for another coin, the IRS wants to know.
“You need to track portfolios and for each trade you’re required to report it to the IRS. It’s a taxable event, it’s a reporting event.”
The intersection of crypto investment and taxation is still under exploration, and that, we can speculate, is a large part of the IRS’s lack of guidance. They’re just as new to it as investors, CPAs, and the CEOs of trading platforms.
While there isn’t much point stressing about the aspects we don’t have specific guidance on, crypto investors can at least enjoy the loopholes while they last.
Featured image from Shutterstock.