Cryptocurrency still feels like the Wild Wild West still when tax preparers are searching for regulations as to exactly how to advise their clients. Most of us know the requirement to report client investment in virtual currency but after that, there are plenty of places to raise questions.
Virtual currency is volatile, but in recent weeks large swings in popular coins like Bitcoin are leaving a lot of your clients with big losses and most likely some questions about how that impacts their tax planning. Virtual currency losses can be reported on Schedule D of your clients’ tax returns just like any other stock losses, up to $3,000 capital loss per year with additional losses being carried over.
The caveat is that like every other stock, clients must sell and dispose of the investment to take the loss.
Here’s the rub with virtual currency: Unlike stock sales, there are no rules related to wash sales for virtual currency.
That means that currently, the regulations do not necessarily prevent a virtual currency owner from disposing of their coins one day to capture the loss and then repurchasing the same coins the next day.
That’s not to say that the IRS will not try to recoup revenue in an audit situation, but taxpayers currently have a risk/reward analysis to assess.
The best advice for clients to avoid potential audit issues later is to wait the 30 days after selling the coins before repurchasing, however, some accountants argue that with the volatile price of virtual currency, even a shorter period can create the risk of economic loss that is essentially required with wash sale rules.
In either case, informing clients of their options is the best way to add value and help them harvest potential losses from these investments. You should especially consider clients who normally are taxed on high gains or investment income from conventional investments who might be able to benefit from substantial tax savings with this knowledge.