Regarding gains with crypto and taxes

[worldtraveler78]

I had some questions regarding gains made with crypto trades:

- The exchange that I am using says that a 23.72% tax has to be paid per FTA tax regulations, before withdrawing any money. Is that separate from income tax? Do I need to pay capital gains on the full profit amount or can I subtract the FTA tax above from the profits? 

[rjs]

FTA = Federal Transit Administration? Federation of Tax Administrators? Forum on Tax Administration? Free Trade Agreement? Federal Tuition Assistance? . . . ?

If you're talking about a Free Trade Agreement, what country is it with, and why is another country involved? Are you a U.S. citizen and do you live in the United States? (Your user name, "world traveler" suggests you might not be.) What crypto exchange are you using?

[worldtraveler78]

Thank you for your response... Yes, I am a US citizen and stay in the United States. I am trying to gather more details on this FTA reference. I am using this exchange: https://www.ltg-goldrockb.com/#/home for trades. This is the first time that I am trying to withdraw money, so hopefully this is not a scam.

[Opus 17]

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@worldtraveler78 wrote:

Thank you for your response... Yes, I am a US citizen and stay in the United States. I am trying to gather more details on this FTA reference. I am using this exchange: https://www.ltg-goldrockb.com/#/home for trades. This is the first time that I am trying to withdraw money, so hopefully this is not a scam.

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We can't tell you exactly what is going on, but we have seen this question before and we are concerned the exchange is scamming you.

Under US tax law, you are required to pay capital gains tax on your gain, the increase in value from the purchase price to the selling price.  Gain is taxed at 15% for most people and 20% for some.  There is no US tax law that requires a foreign company to withhold US tax.  If someone is not a US citizen and has US income, under some circumstances, US tax law may require the US payer to withhold tax.  But US tax law is not binding on foreign entities.  Assuming this company is registered in country X (not the US) they would follow X's tax laws and you might owe capital gains tax to X, but the IRS can't force X to enforce US tax laws against a company registered in X.

Further, even if there is a legitimate need to withhold taxes from the sale, there is no reason to pay those taxes in advance.  If you cash out $1000 and the exchange claims to need to withhold $250, there is no reason they can't cash you out and pay you $750, and send the rest to the IRS.  It is a big warning sign that they want to you pay the tax in advance.  

We can't tell you what to do about your situation, but it has nothing to do with US tax law. 

[worldtraveler78]

One tangential followup question: Luckily I had invested only a little bit (which I would have been comfortable losing with my stock trading on a risky stock) - if indeed this turns out to be a scam, can I claim this as a capital gains loss on my 2022 tax return? After all, if there had been gains, I would have had to report it as such, so it should be only fair that I can claim the loss.

[Opus 17]

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@worldtraveler78 wrote:

One tangential followup question: Luckily I had invested only a little bit (which I would have been comfortable losing with my stock trading on a risky stock) - if indeed this turns out to be a scam, can I claim this as a capital gains loss on my 2022 tax return? After all, if there had been gains, I would have had to report it as such, so it should be only fair that I can claim the loss.

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That's a legal question, I can discuss the key points, but you will have to decide.

Theft losses are no longer deductible unless connected to a federally declared disaster.  Capital losses are deductible.  In times past, theft losses were deductible subject to a 10% deductible.  Sometimes, there would be advantage to deducting 90% of loss right away as a theft, especially if you had no capital gains and could only take the capital loss at $3000 per year.  The IRS had some thoughts on that.  For example, a man discovered a valuable painting was a forgery, and deducted the loss as theft.  The IRS denied and it went to Tax Court.  No one disputed that the gallery and previous owner believed in good faith the the painting was genuine and the forgery must have occurred 80 year or more prior.  The Tax Court ruled that for there to be a theft, there must be a thief, and since there was no one in the present situation who could be defined as a thief, the painting should be treated as a capital loss, not a theft, and even the capital loss could not be claimed until it was realized by selling the painting.

This creates an interesting situation with cryptocurrency.  When someone announces a new coin, takes a few million dollars on day 1 from people with FOMO, and then disappears, that's clearly theft, not a capital loss, and the regulations would indicate it is not deductible.  I don't know if there have been any Tax Court cases on this since it is a fairly new phenomenon.  

So if you take a loss because of "exchange fees" (just the normal cost of doing business) that might be a capital loss, but if this is clearly theft (maybe the organizers get arrested at some point) then it's theft.  The tax laws might revert to the old rules in 2026, but for now, theft is not deductible while a capital loss is deductible.  I can't tell you what this would be, assuming you lose the money.