The U.S. Internal Revenue Service has just released new tax guidance for crypto traders and investors.
The long-awaited document compiles a range of questions and concerns, covering the information in a Q&A format.
It marks the first formal tax guidance on cryptocurrency from the IRS since 2014. As noted previously, cryptocurrency (aka virtual currency) is treated as property for Federal income tax purposes.
The new guidance, “Frequently Asked Questions on Virtual Currency Transactions”, spells out rules for airdrops, tax consequences for coin exchanges between wallets and how to calculate fair market value (FMV).
The IRS also notes how taxpayers should calculate a gain or a loss when exchanging “property for virtual currency”.
“Your gain or loss is the difference between the fair market value of the virtual currency when received (in general, when the transaction is recorded on the distributed ledger) and your adjusted basis in the property exchanged.”
However, there is no mention of nominal crypto expenditures, i.e. using Bitcoin to buy a cup of coffee. The IRS makes no explicit statements about small cryptocurrency transactions being covered by “de minimis” exemptions.
Jake Chervinksy, general counsel at Compound Finance, calls the document “a mixed bag.”
“Some parts are helpful (calculating FMV); some are bad but expected (payments = capital gains/losses); some are nonsense (forks/airdrops).”
Washington DC-based Coin Center calls the IRS guidance “messy”.
“Any hard fork with new coins (e.g. Bitcoin Cash or Ether Classic) will create an income event for taxpayers…
Hard fork and airdrop terminology is used incorrectly…
What now? Coin Center will need to take some time to figure out next steps but it’s unlikely we can fix these bad outcomes merely by seeking additional clarity from the IRS.”
Jameson Lopp, chief technology officer at Casa Hodl calls it “a hot mess.”
Today's IRS guidance is a hot mess.
1. What if you have keys but no software from which to spend the asset?
2. What if you never sell or transfer the asset and it drops 90% in value?
3. What's the value if the asset isn't even trading at the time of fork?https://t.co/jJ5SdXU72i pic.twitter.com/SpTOIOKqg0
— Jameson Lopp (@lopp) October 9, 2019
Crypto Tax Girl, a CPA and cryptocurrency tax specialist, synopsizes the new guidance for her followers on Twitter.
“The biggest change is the following: ‘If a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you receive that cryptocurrency.’ Aka – we can no longer assign a $0 cost basis to forks. These are now income.
The amount of income you recognize is “equal to the fair market value of the new cryptocurrency when it is received… provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.
Another big thing to note – you can use the specific identification method of accounting, but the default is FIFO.
They also clarified that you can add the amount you pay in fees to your cost basis:
‘Your basis (also known as your ‘cost basis’) is the amount you spent to acquire the virtual currency, including fees, commissions and other acquisition costs in U.S. dollars.
If you receive cryptocurrency from an exchange for using their exchange, the fair market value of this cryptocurrency is considered income.
There was also a comment about valuation – when determining ‘fair market value’ we are to use ‘a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact DATE and TIME’ (no daily averages).
If you receive crypto from a company/individual but those coins are not currently being traded on any exchange, the far market value of that cryptocurrency is determined based on the FMV of the property/services supplied to the company/individual.
If you receive crypto as a gift, your basis is determined by whether you’ll have a gain or loss when you sell/spend/trade it.
If a gain, the basis is equal to the donor’s basis.
If a loss, the basis is equal to the lesser of the donor’s basis, or the FMV when you received it.
Your holding period in the crypto you received as a gift is inherited from the giver, unless you do not have documentation showing when it was first acquired by the giver. In that case, the holding period begins when you receive the crypto.
Important to note – transferring coins between your own wallets/exchanges/accounts is not taxable, even if you receive a 1099-K, or other document from an exchange showing that these were taxable events.
Regardless of whether you receive a 1099 or W-2, any crypto received as income must still be reported as income.
And finally – you are ‘required to maintain records that are sufficient to establish the positions taken on tax returns. You should therefore maintain, for example, records documenting receipts, sales, exchanges, or other dispositions of (crypto) and the FMV of the (crypto)’.
You can check out the new tax guidance here.