The Internal Revenue Service (IRS) is in the cryptocurrency news today for publishing its first crypto tax guidance in five years, helping users to calculate the taxes they owed on their cryptocurrency holdings. According to industry members who have been eagerly awaiting the update since May 2019, the fact that IRS issued this guidance shows that the agency has been working on a solid framework.
For those of you who haven’t been following our Bitcoin and ETH news, the IRS published a guidance in 2014 – but it was not that clear and left many questions unanswered. The crypto market since then has grown more complex.
As expected, the new guidance notice released on Wednesday addresses the following:
- the tax liabilities created by cryptocurrency forks;
- the acceptable methods for valuing cryptocurrency received as income;
- how to calculate taxable gains when selling cryptocurrencies.
According to Drew Hinkes who is a lawyer with Carlton Fields and the general counsel to Athena Blockchain “from the tax collector’s standpoint, this is the right answer,” even though his Certified Public Accountant Kirk Phillips said he was surprised that the guidance basically only addressed forks.
When it comes to forks and the fact that IRS issued a guidance, the Internal Revenue Agency says that 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 other words, the documents show that tax liabilities will only apply when the new cryptocurrencies are recorded on a blockchain – and 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,” the document reads.
Accrding to Jerry Brito who is an executive director at Coin Center, the IRS language might create even more confusion.
“While the new guidance offers some much-needed clarity on certain questions related to calculating basis, gains, and losses, it seems confused about the nature of hard forks and airdrops,” Brito told the media a while ago, adding that “one unfortunate consequence of this guidance is that third parties can now create tax reporting obligations for you by simply forking a network whose coins you own, or foisting on you an unwanted airdrop.”
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