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?

[stvnguan]

To my understanding, sending crypto is not a taxable event, and the cost basis of the receiving person is the price when I send. I am worried that the capital loss I incurred would just disappear.

[stvnguan]

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?

[NCperson]

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%20.... 

thoughts?

[Opus 17]

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.

[TomD8]

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

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

[fanfare]

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 

[NCperson]

@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

[NCperson]

@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? 

[Opus 17]

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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

Q19.  Will I recognize a gain or loss if I sell or exchange property (other than U.S. dollars) for v...

A19.  Yes.  If you transfer property held as a capital asset in exchange for virtual currency, you will recognize a capital gain or loss.  If you transfer property that is not a capital asset in exchange for virtual currency, you will recognize an ordinary gain or loss.  For more information on gains and losses, see Publication 544, Sales and Other Dispositions of Assets.

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.

[stvnguan]

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?

[stvnguan]

@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.

[Opus 17]

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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.

---

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.

[Rick19744]

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.

[stvnguan]

@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.

[NCperson]

@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.