Vincent Ooi, Assistant Professor, Yong Pung How School of Law, Singapore Management University, Singapore.Â
Email: vincentooi@smu.edu.sg
My paper, The Case for Stronger Scrutiny of the Deductibility of Crypto Losses, which was recently published by The Journal of Tax Administration, discusses the issue of crypto losses and risks to the tax base. It submits that tax authorities and national legislatures should step up their scrutiny of the deductibility of crypto losses and proposes some ways in which this can be done in practice.
The Deduction of Losses Against Income
Most tax systems provide for some mechanisms for the deduction of losses against income. In policy terms, relevant factors for determining whether a loss should be deductible include 1) scale and 2) relevance. For scale, the question arises as to whether the quantum of losses can be so large or the deductions so erratic that a policy decision needs to be made in order to regulate the deductions. For relevance, the question arises as to whether a link can be drawn between the source that incurred the losses and the income that the taxpayer seeks to deduct the losses against.
Crypto Losses and Policy Issues
Crypto losses, in particular, tend to raise policy issues when it comes to the discussion of their âscaleâ. They have the potential to do more damage to the tax base than losses from traditional financial markets. Firstly, the massive fluctuations in the value of cryptoassets and its overall volatility eclipses that of traditional financial instruments. This may, at least in part, be a result of the next reason: the general lack of investor protection and education in place due to the relative novelty of the crypto markets. Finally, crypto markets are considerably easier to access than traditional financial markets. At least until crypto markets stabilise and are better regulated, there is a case for saying that crypto losses should be of particular concern to tax systems.
There are also policy issues when it comes to the discussion of crypto losses and the ârelevanceâ to the income that taxpayers seek to deduct them against. There is a fundamental question of fairness as to whether crypto losses should be cross-subsidised by income from other sources that may have nothing to do with crypto assets. There are two stages at which crypto losses may be regulated. At the first stage, the issue is whether crypto losses can be set off against income from other sources. At the second stage, the issue is how such losses can be âshiftedâ. Common ways in which tax systems allow losses to be shifted include carrying them forward, carrying them back, and through group relief provisions.
Safeguarding Recommendations
There are numerous options for safeguards at both the first and second stages that should be carefully considered. In my article, I submit that safeguards at the first stage are of particular importance and propose that a loose âsource matchingâ requirement should apply to crypto losses. Crypto losses from the carrying on of a trade or business should only be deductible against crypto income. Crypto losses that are not from the carrying on of a trade or business should continue to be subject to strict âsource matchingâ.
References
- Ooi, V. (2024). The Case for Stronger Scrutiny of the Deductibility of Crypto Losses. The Journal of Tax Administration, 9(1), 50â65. https://jota.website/jota/issue/view/16 Â Â