If I pay someone back by sending BTC from my wallet to theirs, and the BTC is worth less than when I bought it, can I claim a capital loss even though I never sold BTC?

Thanks for the reply, very helpful! If it was the other way around and I made gains on my BTC, I would have to pay capital gains tax right?

can we go back on this one? 

 

@stvnguan why did you send BTC to someone else? were you buying a good or service? if yes, then you bought the good or service and sold the BTC to complete the exchange. You must report the sale of the BTC as a taxable event, using your cost basis in the BTC to determine the gain / loss

 

@Critter-3 - I do not believe the Euro example works.  This is the whole issue with crypto is my understanding.  Crypto is considered an asset and NOT a currency by the IRS.  So each trade of the crypto is a taxable event.  When exchanging crypto for a good or service, that sale of the crypto is a taxable and reportable event as you have disposed of an asset (the crypto).

 

if you buy a slice of pizza with crypto, you've exchanged the cypto to buy the pizza and have to report the sale of your asset.  That is very different than flying to Paris and exchanging dollars for Euros and buying the same slice of pizza - because of the IRS view of assets (e.g. crypto) versus currency (e.g. euros).   This is what makes crypto so difficult to use - each transaction is reportable to the IRS. 

 

here is one article: 

 

https://time.com/nextadvisor/investing/cryptocurrency/cryptocurrency-tax-guide/#:~:text=The%20IRS%20considers%20cryptocurrency%20holdings,request%20an%20extension%20to%20file. 

 

thoughts?

If you hold cryptocurrency for investment purposes, your gains are taxable and your losses are probably deductible, although this is a bit of a gray area.

 

If you are using cryptocurrency as money, you must report any gains when the cryptocurrency is converted to what the IRS considers "real" money or goods or services, but you can't deduct your losses.

 

Suppose someone pays you $50 in BTC for something you sold on Facebook marketplace, in February 2022, when BTC was $42,000.  You actually received 0.00119 BTC.  In July 2022 you buy a pizza for $10 of BTC, at today's price that's 0.000419 BTC.  From the February price, that's a $7 loss.  That's non-deductible.  It's just gone. 

 

On the other hand, suppose someone pays you $50 in BTC for something you sold on Facebook marketplace, in October 2020, when BTC was $10,000, that's .005 BTC.  When you buy the pizza, it costs you .000419 BTC which has a present value of $10 but a cost of $4.19, which is a $5.81 taxable gain for you.

 

If you track cryptocurrency the way the IRS says, you have to report lots of transactions and pay income tax on every transaction with a gain, and you can't deduct transactions with a loss.

 

 

The IRS actually has an excellent FAQ page on this topic:

https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

IRS considers Bitcoin an asset not a currency.

When you transfer ownership, it is a SELL transaction.

Commonly, Bitcoin transaction are not reported on a 1099-B.

You report on Form 8949 with Box C or F checked.

 

@stvnguan 

@Opus 17   -  my understanding is that the IRS considers cryptcurrency as an asset, so any sale of that asset is reportable as either a gain or loss (depending on the cost basis).   Can you please help me understand why you can't report a loss when selling crypto at a loss ( when using it to buy a good or service) ?  I can't find that documented anywhere.  if the crypto is traded for another asset, it is a sale (and a reportable gain / loss) and no different than trading that crypto for a good or service (and also having to report the gain / loss) is my understanding.

 

thanks in advance

 

 

 

@TomD8 - thank you for that link

 

Q14 and Q16 - use of virutal currency to pay for goods (Q16) and services (Q14) results in a reportable gain / loss 

 

@Opus 17 - do you agree? 

 

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@NCperson wrote:

@TomD8 - thank you for that link

 

Q14 and Q16 - use of virutal currency to pay for goods (Q16) and services (Q14) results in a reportable gain / loss 

 

@Opus 17 - do you agree? 

 

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See below.  There is a difference between personal property and investment property.  You can have a technical capital loss on the sale of personal property, but it is not tax deductible.  The question is whether the cryptocurrency in question is investment property or personal property.  

 

See Q19

 

 

 

Publication 544 pg 20

Personal-use property. Generally, property held for personal use is a capital asset. Gain from a sale or exchange of that property is a capital gain. Loss from the sale or exchange of that property is not deductible. You can deduct a loss relating to personal-use property only if it results from a casualty or theft.

 

Publication 544 pg 34

Personal-use property. Report gain on the sale or exchange of property held for personal use (such as your home) on Form 8949 and Schedule D (Form 1040), as applicable. Loss from the sale or exchange of property held for personal use is not deductible. But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, report the transaction on Form 8949 and Schedule D, as applicable, even though the loss is not deductible. See the In- structions for Schedule D (Form 1040) and the Instructions for Form 8949 for information on how to report the transaction.

 

 

Here is IRS notice 2014-21:

https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21

 

Q–6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

A–6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.

 

Q–7: What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?

A–7: The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. See Publication 544 for more information about capital assets and the character of gain or loss.

 

Okay, so the real situation is this: I want to buy something for ~$17,000 (a watch which is also an asset?), but my credit limit would make that process difficult. So instead, someone else will buy said item for me and I will send them the $17,000 worth of BTC from my wallet to theirs to pay them back. The BTC I have is worth significantly less than when I bought it.

 

1. Would I be able to claim a loss in this case? And how would taxes work for the other person here?

 

2. Is it just simpler to sell my BTC and give them the cash, with the downside being the delay to transfer money around?

@Opus 17 

In my case, I definitely wouldn't consider my BTC a personal-use property since I bought it as an investment. So according to the IRS FAQs I would be able to recognize a capital loss by sending BTC to pay someone else back.

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@stvnguan wrote:

@Opus 17 

In my case, I definitely wouldn't consider my BTC a personal-use property since I bought it as an investment. So according to the IRS FAQs I would be able to recognize a capital loss by sending BTC to pay someone else back.

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I don't feel I can comment further.  That is certainly an argument you are allowed to make.  If audited, you will have to back it up.

Let's attempt to draw a conclusion here:

• I believe some of the threads here are attempting to take a position that would never prevail if challenged.
• The IRS is generally going to "couch" their responses, especially in FAQs
• As noted in the FAQ, crypto is treated as property (FAQ #2); referred to as virtual currency in the FAQ.
• FAQ #4 is the key, in which the IRS states that selling crypto for "real" currency generates a recognition event and will produce a gain or loss.
• Somewhere along the line in the responses here, because Pub 544 is referenced, there is a stretch that there could be an argument that crypto could be personal property and no loss allowed.  Not a position that would prevail.
• Personal-use property are items such as your car, TV, home, most jewelry, etc.  These items are, in general, not purchased as investments.  Yes, in general these items are capital assets, but the regulations do not allow a loss upon sale.
• @stvnguan you would report any gain or loss upon the sale of your crypto; turning the virtual currency into real currency, which you in turn use to purchase a watch, which in most cases, will be personal-use property.  Whether at this point you are purchasing the watch as an investment is beyond the scope of the question and forum.

@Rick19744 

Thanks for your reply. Some confusion: on your last bullet point, technically I didn't turn my virtual currency into real currency to then purchase a watch. I exchanged my virtual currency for the watch that my friend bought using his credit card. I'm not sure if that's an important distinction or not.

 

I'm also not sure why it matters whether the watch is personal-use property (let's just assume it is personal-use property) because I'm only asking about deducting the loss on my virtual currency that I used to acquire a "good", with that "good" being a watch.

@stvnguan - I think what is being stated is that 

 

1) if you sold the virtual currency and bought US dollars and THEN used the US dollars to buy the watch, then the loss on the virtual currency / US dollar trade would be a deductible loss as you closed out your investment in the virutal currency.

 

but that is not what occured.

 

2) you traded the virtual currency for the watch, using a friend as an intermediary, and the watch is a personal use item.  So in this case, there is no investment loss because there was no recognition of a investment trade.

 

3) if you walked into the jeweler and he accepted virtual currency (in other words taking the friend out of the middle), again the trade is virtual currency for a personal use item and there is no deductible loss.

 

 4) even thought the watch is a 'good'. it's being used for personal use. 

 

That is how I interpret what everyone wrote; I may not have it totallty correct.

@NCperson 

The dichotomy is that some users argue that cryptocurrency losses are always deductible, no matter what the CC is used for and no matter how it was held.  In other words, if you take a loss on a coffee at Starbucks, its a deductible loss.

 

Some users argue that CC losses are only deductible if the CC was held for investment purposes. (This is my position.)

 

I think you have advanced a hybrid position that if CC is used to purchase an investment, a loss is deductible.  

 

I am not qualified to comment further than I have previously.  As always, hiring your own professional accountant to give you advice, who will represent you at audit, may be preferable to taking advice from random people on the internet.  

@Opus 17 

 

<< I think you have advanced a hybrid position that if CC is used to purchase an investment, a loss is deductible.  >>

 

not sure where I did that and if so was unintended....

 

trading CC for US currency is a trade, but not an investment, but it does close out the investment position on the CC.

If CC is used to purchase an investment doesn't create a loss; only the eventual sale of that investment creates a loss  - I know you know that - just strugging with how I advanced a hybrid position, even unintentionally

 

thx 

 

@Opus 17 @NCperson 

I know we've discussed this already, but according to question 16 on https://www.irs.gov/individuals/international-taxpayers/freque[product key removed]ions-on-virtual-currency-transactions, you recognize a capital gain or loss if you exchange virtual currency held as a capital asset (which is what I am doing) for other property, "including for goods...". This would directly contradict what you are both saying. Look up a definition of "good" - it is NOT defined as "something held for investment" or similar. The Q&A on this is extremely clear.

 

It simply does not matter what kind of good you are trading virtual currency for, it only matters if your virtual currency ITSELF is being held for personal use or for investment. Seeing as I have no clue how to use BTC as a personal use item (seriously, how could that be done?), it is clear that I am allowed to claim a capital loss.

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@NCperson wrote:

@Opus 17 

 

<< I think you have advanced a hybrid position that if CC is used to purchase an investment, a loss is deductible.  >>

 

not sure where I did that and if so was unintended....

 

trading CC for US currency is a trade, but not an investment, but it does close out the investment position on the CC.

If CC is used to purchase an investment doesn't create a loss; only the eventual sale of that investment creates a loss  - I know you know that - just strugging with how I advanced a hybrid position, even unintentionally

 

thx 

 

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Because my understanding is that every time you convert out of CC into something "real" (including official fiat currency, goods or services, or even other CC), that is a taxable event, no matter what is purchased.  In other words,

 

• If you convert from BTC to Etherium, that's a reportable event.  You recognize a gain or loss on the US$ value of the conversion on the BTC on the day of the trade, and the basis of your new Etherium is the price on the day of the conversion, you don't carry forward your original basis in BTC.
• If you sell BTC to buy a coffee, that is a taxable event and you have a gain or loss based on the US$ value on that day.
• If you sell BTC to buy investment property, that is a taxable event and you recognize a gain or loss on the US$ value of the BTC at the time of the trade, even if the thing you buy is an investment.  Your basis in the investment property is the US$ value on the day of the purchase, and not the original basis in the BTC.

 

At least, that is my understanding. 

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@stvnguan wrote:

@Opus 17 @NCperson 

I know we've discussed this already, but according to question 16 on https://www.irs.gov/individuals/international-taxpayers/freque[product key removed]ions-on-virtual-currency-transactions, you recognize a capital gain or loss if you exchange virtual currency held as a capital asset (which is what I am doing) for other property, "including for goods...". This would directly contradict what you are both saying. Look up a definition of "good" - it is NOT defined as "something held for investment" or similar. The Q&A on this is extremely clear.

 

It simply does not matter what kind of good you are trading virtual currency for, it only matters if your virtual currency ITSELF is being held for personal use or for investment. Seeing as I have no clue how to use BTC as a personal use item (seriously, how could that be done?), it is clear that I am allowed to claim a capital loss.

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I don't believe I have said anything different.  You recognize a gain or loss when you exchange cryptocurrency for any other property for any reason.

 

However, recognizing a loss and taking a tax deduction for that loss are separate under the law.  If you sell personal property (your used bicycle, for example) for less than you paid for it, you have a loss, but it is not tax deductible.  If you sell investment property (gold coins, for example) for less than you paid, that also creates a loss, but that loss is tax deductible.  This is settled law and non-controversial, although there have been tax court cases where the IRS and the taxpayer disagree over whether a particular piece of property was personal or investment.  (For example, if you bought land hoping to resell it to a developer at a profit, but it decreased in value instead, you can deduct the loss.  However, the IRS might determine at audit that you bought the land to build a second home, which is personal, so it wasn't really an investment.  That's how it can end up in court.)

 

Where we so-called "Champs" disagree is whether cryptocurrency losses are always deductible, or only deductible if the cryptocurrency is held for investment purposes.  I'm sorry to confuse you, and I don't have anything to add on that particular point of disagreement beyond the comments I previously posted.  

@Opus 17 Thanks for the clarification. However, the definition of "recognize a loss" (which is the wording they use in the Q&A) is that you can deduct the loss from your taxes. You may be thinking of "realize a loss" which means what you've been saying: a realized loss may have no impact on taxes depending on personal-use, etc.

 

Since they use "recognize", it is clear that virtual currency losses are always deductible when exchanged for goods and services.

My position is that with every CC transaction there will be two events:

• the conversion of CC, virtual currency, into real currency.  At this point you will have a recognized gain or loss event (first event).
• then the purchase of the item; this could be the watch, could be services, etc. (second event).
• there are no like-kind or barter provisions that would change the above result.  Just because you "exchanged" your CC for a watch, you still have a recognition event on the CC since you no longer own or possess it (disposition of an asset).  Your watch, in this example, takes a basis of the value of the CC at the time of the transaction.
• In summary, a taxable event occurs when there is a sale or disposition of an asset.  With CC, a taxable event occurs whenever it is traded for cash or other cryptocurrency OR whenever CC is used to purchase goods or services.  As noted in bullet 3, in your case, you had a disposition since you no longer hold the CC as you used it to purchase the watch.

Now BTC is falling down extremaly. And we save some money on transaction, but loose on its price. I've read some investors' ideas in this article. Maybe, it'll be useful for you