The Internal Revenue Service (IRS) has been urged by the American Institute of CPAs (AICPA) to provide guidance regarding the tax implications of digital asset losses. In a statement, AICPA Director for Tax Policy & Advocacy, Eileen Sherr, said, “With the complexities and recent bankruptcies involved with digital asset exchanges, taxpayers and practitioners are facing many issues with the tax treatment of losses of digital assets and need guidance.”
The AICPA focused on the tax treatment of losses incurred by individual investors rather than businesses. One of the scenarios highlighted was the determination of the worthlessness of a digital asset. AICPA noted that according to Chief Counsel Advice (CAA), “a loss may be sustained…if the cryptocurrency becomes worthless resulting in an identifiable event that occurs during the tax year.” However, CAA also noted that cryptocurrency can be valued at less than one cent but still greater than zero, which means that it could potentially create future value. The AICPA wrote that if “the position of Treasury and the IRS is that a cryptocurrency is listed on an exchange and has liquidating value greater than absolute zero, we recommend that Treasury and IRS state this in binding guidance.”
Another issue raised by AICPA was whether digital assets could be considered securities for tax purposes. The organization requested authoritative guidance on when, if ever, worthless security capital loss treatment would apply to cryptocurrency and other digital assets. Additionally, AICPA recommended that binding guidance should be provided on basis determination for digital assets, as this is relevant to measuring gains and losses.
The organization also called for guidance on the treatment of lending of virtual currency and other digital assets. The organization recommended that guidance should cover not only losses from “lending” virtual currency and other digital assets but also the categorization of the income generated and related expenses.
Other topics addressed by AICPA’s comments included the indications of abandonment of a digital asset, whether the Ponzi loss guidance applies beyond Ponzi losses to other fraudulent arrangements, and when section 1234A would apply to the termination of a digital asset. The AICPA also requested guidance on how a taxpayer should report digital asset activity if they are unable to access their records due to bankruptcy.