TaxProf Blog

Xuan-Thao Nguyen (Washington) and Jeffrey A. Maine (Maine), Crypto losses2024 U.Ill. L. Rev. __ :

The crypto industry has been hit hard by various market forces and scams, leaving investors with trillions of dollars in losses in recent years. The appropriate tax treatment of such losses has yet to be fully examined, as there is little guidance and paucity of academic literature on the subject. This article attempts to fill this gap by applying general tax principles to crypto losses and making several recommendations to improve the clarity and consistency of tax results.

It explores various theories of the “realization” of crypto loss (including theft, abandonment, and worthlessness), highlighting where additional guidance is needed. And he sees appropriate legislative limits on deductions for crypto loss, acknowledging that by offering a tax deduction subsidy, the government is essentially sharing the risk created by crypto activities. The article proposes a possible new tax framework for crypto losses; specifically, crypto losses should be deductible only from crypto earnings and not from work or other positive income. Such a rule would not be based on the moral disapproval of cryptocurrency trading compared to other investment activities, but rather would be supported by the unified justification that underlies many stop-loss rules in our tax system.

https://taxprof.typepad.com/taxprof_blog/2023/05/crypto-losses.html