With the crypto market falling off a cliff, there are big losses to claim on your taxes, right?

Not necessarily.

As your dollars shake out in the digital world, it is worth asking whether there is any lemonade you can make by claiming losses on your taxes. If you‘ve been trading and triggering big taxable gains but the floor drops out, first consider whether you can pay your taxes for the gains you have already triggered this year.

Taxes are annual, based on a calendar year, unless you have properly elected otherwise. Each time you sell or exchange crypto, even for another cryptocurrency or for goods or services, the transaction is a taxable event.

That is a result of IRS Notice 2014-21, when the IRS announced that crypto is a property for tax purposes. Not currency, not securities, but property. So even trades of one crypto for another are taxable swaps. Before 2018, many crypto investors claimed that crypto-to-crypto exchanges were tax-free.

But that argument was based on section 1031 of the tax code. It was a good argument, depending on the facts and the reporting.

That argument went away starting in 2018. Section 1031 of the tax code now says it applies only to swaps of real estate. The IRS is auditing some pre 2018 crypto taxpayers, and so far, doesn’t appear to like the 1031 argument, even for years before 2018. The IRS even released a piece of guidance saying that tax-free crypto exchanges don’t work. We may need a court case to resolve it if the IRS pushes it, though it only applies to 2017 and prior years.

Regardless of whether you use crypto to pay someone, swap crypto, or outright sell it, you may have gain or loss. For most people, gain or loss is short-term or long-term capital gain or loss based on the basis (what you paid for the crypto), holding period, and sale price.

But how about ordinary gains or losses, are you trading in crypto as a business? Most investors want long term capital gain rates on gain if they buy and hold for more than a year.

However, ordinary income treatment could be helpful for some, at least for losses. Securities traders can make a section 475 mark to market election under the tax code, but does that work for crypto? It’s not clear. To qualify, one must argue that the crypto constitutes securities or commodities. The SEC has argued that some crypto are securities, and there may be arguments for commodity characterization, too.

But in addition to claiming that virtual currency is a security or commodity you need to qualify as a trader to make a mark-to-market election. Trading rather than investing is a key issue in who is eligible to make a mark-to-market election. The IRS says traders have high volume and short-term holding periods, but sometimes investing and trading might look pretty similar.

If crypto turns out to be eligible for mark to market and if you qualify, you could mark to market your securities or commodities on the last business day of the year. Your gain or loss would be ordinary income. A benefit would be that the cumbersome process of tracking the date and time that each crypto was acquired and identifying the crypto you sold would not be required. For most people, this election if available likely won’t make any sense, but as with so much else in the crypto tax world, much is uncertain.

In the past, some drops of crypto have been called a flash crash, an event in electronic securities markets where the withdrawal of stock orders rapidly amplifies price declines, and then quickly recovers. A stop-loss order directs a broker to sell at the best price available if the stock reaches a specified price. Some people use the same idea with crypto.

Some even want to buy the crypto back after a sale, and with crypto, you can do that.

In contrast, with stock, there are wash sale rules, which restrict selling (to trigger losses) and buying back stock within 30 days. There are no wash sale rules for crypto, so you can sell your crypto and buy it right back without a 30-day waiting period.

But however you manage your crypto, think about taxes. IRS audits of crypto are increasing, and the IRS is inquisitive, learning and probing. And state tax audits, notably California’s Franchise Tax Board, are increasing too.

Robert W. Wood is a tax lawyer with www.WoodLLP.com, and can be reached at Wood@WoodLLP.com. This discussion is not intended as legal advice.