December 7, 2023

Janus, the two-headed Roman deity for whom the month January is named, could see the past and the future but not the present. The US Internal Revenue Service (“IRS”) must have been inspired by Janus when thinking about cryptocurrencies recently. On one hand, the IRS looked back to 2022 and issued puzzling but adverse guidance for individuals who were crushed in the cryptocurrency meltdown.1 Looking forward, the IRS postponed broker reporting for cryptocurrency transactions until after it issues final regulations on this topic.2 This Legal Update will explore both of these developments.

I. CCA 202302011

CCA 202302011 provides a relatively simple fact pattern. An individual investor purchases an on-exchange fungible digital token for $1.00 in 2022. After the cryptocurrency meltdown, the token is worth less than $.01 at year-end but is still traded on at least one cryptocurrency exchange. The taxpayer did not undertake any overt acts indicating that he abandoned the cryptocurrency. The taxpayer claims a tax loss for the diminution in value on his 2022 tax return on the theory that the token is either worthless or that he abandoned the token. There is no discussion as to whether the taxpayer was “gated,” that is, there is no discussion as to whether the exchange suspended redemptions so that the taxpayer was unable to sell the token.3 It’s worth noting that the “market price” is indicative of value only if the token can be sold. If the exchange is gated, the…

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