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AICPA Seeks Clarity from IRS About Tax Treatment of Crypto Losses

Ruth Singleton
Published Date:
Apr 21, 2023

iStock-908350372 Blockchain Bitcoin Cryptocurrency

In a letter to IRS Commissioner Daniel Werfel and Principal Deputy Chief Counsel William Paul, the AICPA has asked for guidance on the tax treatment of digital asset losses.

The letter, signed by Jan Lewis, chair of the AICPA Tax Executive Committee, says, "We appreciate that it is challenging for the IRS to issue complete and timely guidance in the digital asset area. Given recent bankruptcies of some virtual currency exchanges and litigation brought by the SEC and other government agencies, one area currently affecting many individual investors involves losses. While existing guidance in the Code, regulations, revenue rulings and court opinions, is helpful, sometimes the unique nature of digital assets and transactions involving digital assets do not clearly fit within the existing guidance, thus leaving taxpayers and practitioners with uncertainty for reporting purposes. For example, Treas. Reg. § 1.165-1(d) on the year for which a loss may be claimed includes that for a casualty or other event, it cannot be claimed if there is a 'reasonable prospect of recovery.' While court cases have explored this term for stock losses, there are no rulings indicating any actions individual investors are expected to take for digital asset losses to know if there is any 'reasonable prospect of recovery.'”

The letter lists eight questions that the AICPA would like to see addressed in future IRS guidance:

1. What facts indicate worthlessness of a digital asset?

2. What facts indicate abandonment of a digital asset?

3. When, if ever, might digital assets be securities for tax purposes?

4. Theft of a digital asset held for investment. Does the Ponzi loss guidance of Rev. Rul. 2009-9 and Rev. Proc. 2009-20 apply beyond Ponzi-losses to other fraudulent arrangements, including digital asset losses from certain digital asset exchange activities?

5. What is the tax effect of lending digital assets? (Some people may find themselves in this position with some bankrupt exchanges.)

6. When would section 1234A apply to termination of a digital asset?

7. How should a taxpayer report digital asset activity if they are unable to access their records due to bankruptcy of an exchange?

8. Is a digital asset considered disposed of by transferring the investor’s interest in a bankruptcy proceeding? Must there be proof of transfer of the underlying digital asset?

The letter concludes by saying, "we recommend that perhaps Treasury and IRS could consider addressing the federal income tax ramifications of the Voyager Digital, Celsius Network, and FTX bankruptcies, and the buying and selling related bankruptcy claims in [a] manner similar to the 'Madoff ruling' (Rev. Proc. 2009-20)."

“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,” said Eileen Sherr, director for tax policy and advocacy with the AICPA, CPA Practice Advisor reported. “Taxpayers and their advisors need clear guidance to accurately calculate their losses and properly meet their tax obligations and we urge the IRS to adopt our recommendations and provide this guidance.” 

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