Stolen $ 600M Crypto Will Be Returned, Can The IRS Tax It?

It’s no secret that the IRS is after crypto in a big way, with warnings, a series of John Doe Summonses in cryptocurrency served on exchanges, and even a crypto question on every tax return. Selling crypto can of course raise taxes, but even buying something with crypto can raise taxes. In fact, even paying taxes in cryptocurrency can trigger more taxes. This tax paradox began when the IRS ruled in its 2014-21 notice that cryptocurrency is owned. This classification has some serious tax consequences that are compounded by wild price fluctuations. If you pay off $ 5,000 in crypto debt, as long as the crypto is worth $ 5,000 when you pay it off, you’re home free, right? Not really. You need to take into account the sale you just made. Transferring the crypto to pay off your debt is a sale, and that could mean more tax for the year of payment. If you bought the crypto for $ 5,000 the day you pay off the debt, there will be no profit. But if you don’t pay off a debt but buy something, it’s worse.

Cryptocurrency theft on smartphone screen. Big Red Chopped Message and Empty Wallet. phone … [+] on a laptop computer.


Paying employees or independent contractors in crypto will result in taxes if they receive it. And if you pay them, you too could suffer a tax collapse since you just sold your crypto on your side of the equation. When paying with crypto, keep in mind that most crypto transfers are taxable unless the transfer is considered a gift or a charitable donation.

There have been many hacked crypto owners claiming tax deductions for their loss. However, the deductions are usually limited to their tax base (purchase price) in the asset, not to the market value. If almost every crypto transfer triggers taxes, how about theft and return? When the Poly Network $ 600 hack occurred, someone claiming losses seemed inevitable until, amazingly, almost all of the $ 600 million in crypto was returned. Also, think of crypto loans in a more humble way, as some crypto “loans” may be taxable. Because if you want to avoid taxes, a home loan should basically involve returning the same property. For loans in cryptocurrency, the parties likely intend that the loaned cryptocurrency be treated as fungible currency rather than property. And that makes the $ 600 million hack and return a good example of an exception to the normal concept that taxes can apply where you might not expect them to.

If you buy stocks and the company refunds your money, were there two transactions or none? Going back to point one may sound simple, but the tax system is rigid and seldom simple. And the annual IRS tax filing requirement means that in most cases each tax year stands on its own. Fortunately, the IRS agrees that some transactions can be completed and that tax effects can be ignored. To pretend that a deal never happened, you have to meet two tough conditions: (1) Each party must return to their position prior to the transaction as if it never happened. Resignation is not a one-way deal. (2) The decline must occur in the same tax year as the transaction. See sales tax regulation 80-58. It is this timing rule that is usually the problem. For example, let’s say you are selling your home and the buyer claims the home is moldy. The dispute is unlikely to be resolved immediately. This often means a subsequent tax year.

For the IRS, each tax year must stand on its own. Some taxpayers who fail to adhere to the IRS’s strict same-year timing rule may argue that a dispute is legitimate as long as the transaction is cleared before reporting the transaction on their tax return. Example: You sell your car to your brother-in-law in September 2011 for $ 25,000. He has problems and will return the car to you in May 2012 and you will refund you the money. Even though your 2011 tax return was due on April 15th, you applied for an extension so it was not submitted when the car was returned. If you file your return for 2011 in August 2012, can you treat that sale as if it never happened? The IRS says no, but some advisors might say yes.

Even the IRS can relax. In several rulings, the IRS has approved waivers, although it could be argued that the parties did not exactly return to the first place. For example, in IRS Letter Ruling 200952036, a partnership was converted into a corporation and then converted back into a limited liability company (LLC). The partners didn’t quite return to first place. After all, when the smoke cleared, they were members of an LLC rather than partners in a partnership. An LLC is not just a partnership. Nonetheless, the IRS treated the transaction as voided and with no tax implications. At least two parties are involved in a withdrawal. What about the simple car example if your brother-in-law submitted his 2011 tax return before it was repealed, maybe even write off or write off the car? There can be many parties in more complicated deals, but I still love resigning.