UPDATED 21:24 EDT / OCTOBER 09 2019


IRS publishes cryptocurrency guidance clarifying when taxes should be paid

The U.S. Internal Revenue Service today issued its first guidance on cryptocurrencies since 2014, clarifying when taxes should be paid on cryptocurrency transactions.

Topping the list was tax liabilities created by cryptocurrency forks, where a cryptocurrency splits or a new group forks off from the original cryptocurrency giving existing holders free cryptocurrency in the process.

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,” the IRS advised. That means tax must be paid on the new cryptocurrency as if the gain were regular income.

Tax liability only applies where a new cryptocurrency was handed out. “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 IRS said.

The basis on which fair market value is determined was also cleared up in the new guidance. According to Coin Center, depending on whether it’s acquired on an exchange or through a peer-to-peer transaction on the blockchain, basis will be the amount you spent to acquire the cryptocurrency, the quoted price on the exchange, or fair market value as reported on an index.

Accounting standards have also been clarified. The IRS advised that taxpayers can use specific identification or first-in-first-out accounting in order to calculate their gains or losses.

“The IRS is committed to helping taxpayers understand their tax obligations in this emerging area,” IRS Commissioner Chuck Rettig said in a statement. “The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”

The guidance has received a mixed response, with some happy that it clears up a number of uncertain items but others pointing out that it’s also not without flaws. Of particular interest was the IRS’ decision to tax a forked cryptocurrency that the taxpayer may have limited access to or that’s difficult to move.

An FAQ explaining the IRS guidance can be found here.

Photo: MBisanz/Wikimedia Commons

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