Silver Lining of the MtGox Ordeal: a Tax Break?

Not that it's a reason to celebrate, but the unfortunate clients of MtGox may be able to claw back some of their losses if they can indeed be claimed in their next tax return (note: anything mentioned here does not constitute formal tax advice).

Forbes discusses how this may be done. Based on an earlier synopsis of the tax implications of bitcoins and cryptocurrency, losses arising from Bitcoin can be claimed as a capital loss. In the U.S., up to $3000 per year of capital losses can be counted against even non-capital gains, such as employment income, reducing the overall amount of tax owed (in Canada however, capital losses can only count against capital gains and not other income). For those who have capital gains, either from bitcoins or elsewhere, then amount of capital losses can be claimed up to and including the amount of capital gains.

Such a scheme makes a big assumption: investing in bitcoins and their ilk enters the realm of capital gains/losses when it comes to taxes. This may not be so simple. While Bitcoin is not considered a currency, the National Journal obtained a statement from the IRS saying:

"The IRS is aware of the potential tax-compliance risks posed by virtual currencies. The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences of virtual-currency transactions."

(It also follows that those who gained from Bitcoin's appreciation in value last year apparently still don't know how they will be taxed come April.)

The next question is for the majority who lost out due to the exchange vanishing with all their holdings, as opposed to cashing out at a trading loss: Does such a calamity, while unfortunate, constitute a capital loss, considering that there was no disposition of the asset in question? Perhaps this can be likened to the delisting of a stock from an exchange. If the company behind the delisted stock goes bankrupt or ceases to operate, one can elect to claim a disposition and re-acquiring of the shares at a value of $0 and thereby claim the capital loss. However, not every delisting is eligible, for example if the company went private and continues to operate. Every situation may be different.

Furthermore, our case wasn't exactly a delisting. Rather, the custodian seems to have disappeared with the asset entirely. There aren't really many comparable examples of such an occurrence in a regulated world with regulated assets- it may be just be considered simple theft, which normally would not be tax deductible.

For those who experienced losses because the value of their bitcoins declined, they may also need to consider if it occurred in the course of trade, investments or business. Under the "Wash-Sale" rule, day traders, for example, cannot claim a capital loss if it happened within a 61-day period of the capital gain on the same security. However, the loss can be appended to the buy price of "replacement shares" from the capital gain, yielding the same effect in many situations. This again assumes that there was a disposition. Many MtGox users watched their holdings decline without liquidating them, and then the exchange disappeared, which brings you back to the previous question.

In general, the treatment of Bitcoin when it comes to taxes will invariably touch upon other areas like: treatment of their CFD's and derivatives; the treatment of their losses if tied to MtGox, coin-to-coin trading (perhaps comparable to Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term trading in a pair outside the taxed currency); how to evaluate the current value of a bitcoin when looking at different exchanges; how gains (or losses?) from mining are viewed (perhaps like a dividend/investment income?), just to name a few.