Selling Crypto to Family or Your Own Company: Section 267 and the Disappearing Loss

It sounds clever: sell a down-and-out coin to your brother at today's low price, claim the loss, and keep the coin in the family for the rebound. The Code saw that coming decades before crypto existed. Section 267 disallows the loss.

This guide explains who counts as related, what happens to the disallowed loss, how the rule interacts with gifts, and what to do instead.

The rule

Section 267(a)(1) says no deduction is allowed for any loss from the sale or exchange of property, directly or indirectly, between persons in any of the relationships listed in section 267(b). Crypto is property under Notice 2014-21. The rule applies to crypto exactly as it applies to stock or land.

The rule disallows losses only. A gain on a sale to a relative is fully taxable.

Who counts as related

Section 267(b) lists the relationships. The ones crypto investors run into most are:

• Members of your family, which section 267(c)(4) defines as your brothers and sisters (whole or half blood), spouse, ancestors and lineal descendants.
• You and a corporation if you own, directly or indirectly, more than 50 percent in value of its stock.
• A grantor and a fiduciary of a trust, a fiduciary and a beneficiary of the same trust, and several related trust combinations.
• A corporation and a partnership if the same persons own more than 50 percent of each.
• An executor of an estate and a beneficiary of that estate, except for a sale in satisfaction of a pecuniary bequest.

Note who is not on the family list: in-laws, aunts, uncles, nieces, nephews and cousins. A sale to your sister is covered. A sale to your sister-in-law is not covered by the family rule, though other rules, including the substance of the transaction, still matter.

Ownership is measured with attribution rules. Under section 267(c), stock owned by family members, partners and entities can be treated as owned by you. A company you think you own 40 percent of may count as more than 50 percent once your spouse's and children's shares are added.

Directly or indirectly

The statute covers sales made directly or indirectly. Selling a coin on an open exchange to an anonymous buyer is not a sale to a relative. Arranging for a relative to buy the same coins at the same time, so the property effectively passes to them, raises the indirect-sale question. If the goal of a transaction is to move property to a related person while recognizing a loss, assume section 267 is in play.

What happens to the disallowed loss

The loss is not simply lost. Section 267(d) gives the buyer a benefit: if the related buyer later sells the property at a gain, the gain is recognized only to the extent it exceeds the loss that was disallowed to the seller. The disallowed loss can reduce the buyer's later gain, but it cannot create a loss for the buyer.

Two exceptions in section 267(d) limit that benefit: it does not apply when the seller's loss was disallowed by the wash sale rule in section 1091, and it does not apply to the extent the seller's loss would not have been taken into account under the regular income tax rules, for example because the seller is a tax-indifferent party.

A worked example

You bought 10 units of a token for $50,000. They are now worth $20,000. You sell them to your daughter for $20,000.

• Your $30,000 loss is disallowed under section 267(a)(1).
• Your daughter's basis is her cost, $20,000.
• If she later sells for $45,000, her $25,000 gain is not recognized, because it does not exceed your $30,000 disallowed loss.
• If she later sells for $60,000, she recognizes only $10,000 ($40,000 gain minus $30,000).
• If she later sells for $15,000, she has a $5,000 loss of her own, and your disallowed loss provides no further benefit.

The family as a whole may recover some value from the loss. You, the seller, get nothing on your own return.

Spouses are a special case

Section 267(g) says the loss disallowance in subsection (a)(1) does not apply to a transfer described in section 1041(a), which covers transfers between spouses and transfers incident to divorce. Those transfers are generally nonrecognition events under section 1041 anyway, so neither gain nor loss is recognized. The result is the same for a loss: no deduction. See the existing guide on crypto in divorce.

Gifts are not a workaround for losses

Gifting a loss asset instead of selling it does not preserve the loss either. The IRS FAQs (Q32) describe the gift basis rule: for purposes of computing a loss, the recipient's basis is the lesser of the donor's basis or the fair market value at the time of the gift. If you give your daughter coins worth $20,000 that cost you $50,000, her basis for loss purposes is $20,000. The $30,000 of built-in loss disappears.

Gifts work well for appreciated crypto, where the donor's basis carries over for gain purposes. They work poorly for depreciated crypto. See the existing guide on gifting cryptocurrency.

Selling to your own company or trust

Investors who hold crypto personally sometimes want to move it into an LLC, a corporation or a trust they control. If the move is a sale at a loss and the entity is related under section 267(b), the loss is disallowed. A corporation is related if you own more than 50 percent in value, counting stock attributed to you from family members and other entities under section 267(c). Several trust relationships are listed, including grantor and fiduciary of the same trust.

Partnerships have their own related-party rules. Section 267(e)(6) cross-references section 707(b) for additional rules on partnerships, so a transfer between you and a partnership you control needs a separate look.

Entity transfers raise other issues as well, such as whether the transfer is a contribution rather than a sale. Map the structure before you move anything.

Records for related-party transactions

If you do transact with family or an entity you control, keep a clean file: the date, the price, the price source, the wallets on each side, and how payment was made. For a sale at a gain, that file supports the amount you reported. For any transaction near a loss, it shows whether section 267 applied and lets the buyer later claim the section 267(d) benefit with proof of the disallowed amount.

Gains get no special treatment

Selling appreciated crypto to a relative produces an ordinary taxable gain. There is no family discount. And if the sale is at a price below fair market value, part of the transaction may be a gift, with gift tax return consequences. Price related-party sales at market, document the price source, and treat the result like any other sale.

What to do instead

• Sell the depreciated crypto to an unrelated buyer, normally on an exchange, and claim the loss. Because the wash sale rule in section 1091 is written for stock or securities, buying the same coin back yourself generally does not disallow the loss. See the existing guide on crypto wash sale rules.
• If you want a family member to own the coin, let them buy it on the market with their own money, independently.
• If you want to give value to family, give cash or appreciated assets, not depreciated ones.
• If you own a company or trust that holds crypto, map the relationships before moving assets between you and the entity.

If you already sold to a relative and claimed the loss on a filed return, the deduction was not allowed under section 267(a)(1), and the return should be corrected. See amending a return to report crypto.

Section 267 does not prohibit family transactions. It prohibits using them to manufacture deductions. Keep the losses on arm's-length sales and the family planning on gifts and appreciated property, and the rule never bites. See tax-loss harvesting.

Frequently asked questions