IRS Issues Crypto Tax Guidance! The IRS issues crypto tax guidance following a 5 year hiatus on providing guidance to US crypto holders.
Industry members have been waiting for this update since May of 2019 when IRS Commissioner Charles Rettig said that the agency was working on fresh guidance. The crypto market has become more complex and large since the 2014 Guidance was released – the 2014 Guidance itself left many answers unanswered.
Some of the questions that have plagued US customers have been addressed in the guidance – tax liabilities created by cryptocurrency forks, methods of valuing cryptocurrency received as income, and how to calculate taxable gains when selling cryptocurrencies.
According to the new guidance, new cryptocurrencies created from a fork of an existing blockchain should be treated as “an ordinary income equal to the fair market value of the new cryptocurrency when it is received.”
In layman’s terms, the tax liabilities will apply when the new cryptocurrencies are recorded on a blockchain – if a taxpayer actually has control over the coins and can spend them.
“If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.”
Individuals, in simple terms, would be assessed income when they receive the forked coins. This has major implications. For instance, if you have an Ethereum wallet, you could receive an ERC-20 token from an airdrop without realizing it. The token could be worth more when you receive it, ergo, counting as income, and by the time you realize it, and sell the token, the value could be far less than what you received it at. The implication being – you’d have to pay taxes on something that no longer has the value when you received the token.
The IRS also provided long-awaited clarification on how taxpayers can determine the cost basis, or fair market value of coins received as income, such as from mining or the sale of goods and services. For this – cost basis should be calculated by summing up all the money spent to acquire the crypto, “including fees, commissions, and other acquisition costs in US Dollars.”
A third issue that the IRS has addressed is how to determine the cost basis of each unit of cryptocurrency that is used in a taxable transaction (such as a sale). This has been a stubborn question due to many having “stacked sats”, IE, buying Bitcoin or other cryptocurrencies at different points, values, and times.
The guidance states that taxpayers can identify the coins that they are disposing of, “either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units” in a single account or address.
The new guidance allows for “first-in, first-out” accounting, or specifically identifying when the cryptocurrencies being sold were acquired. This is important, as some may want to declare your holdings as capital gains, and sometimes you might want to record a loss.
The IRS has specifically said that they do not plan on creating an exemption for transactions below a certain threshold. Paying somebody for service will, WILL result in a capital gain or loss, and how that’s calculated should be “the difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged”.
This piece of unfortunate news from the IRS will discourage casual spending of cryptocurrencies for many users. What do you think? Let us know what you think on our Facebook page!
