The IRS and You: New Cryptocurrency guidance issued

Do you live in the U.S. and own cryptocurrency? Have you filed it on your taxes? If you haven’t -- or misreported how much -- there’s some serious risks ahead. The IRS has just published a whole slew of new guidelines -- so excuses like “I didn’t know I had to report” or “I didn’t know how much to report” -- are drying up fast.

Date: 
October 11, 2019
Read time: 
2 minutes

The IRS and You: New Cryptocurrency guidance issued

Date: 
October 11, 2019
Read time: 
2 minutes

Do you live in the U.S. and own cryptocurrency? Have you filed it on your taxes? If you haven’t -- or misreported how much -- there’s some serious risks ahead. The IRS has just published a whole slew of new guidelines -- so excuses like “I didn’t know I had to report” or “I didn’t know how much to report” -- are drying up fast.

Do you live in the U.S. and own cryptocurrency? Have you filed it on your taxes? If you haven’t -- or misreported how much -- there’s some serious risks ahead. The IRS has just published a whole slew of new guidelines -- so excuses like “I didn’t know I had to report” or “I didn’t know how much to report” -- are drying up fast.

The Internal Revenue Service agency’s 2014 guidance didn’t answer all relevant questions. And, unfortunately, the crypto market has become far more complex in the last few years.

“in July of this year, the IRS announced that it began mailing educational letters to more than 10,000 taxpayers who may have reported transactions involving virtual currency incorrectly or not at all. Taxpayers who did not report transactions involving virtual currency or who reported them incorrectly may when appropriate, be liable for tax, penalties, and interest. In some cases, taxpayers could be subject to criminal prosecution.”

Below you’ll find a few key points in summary. If you’d like to know more please visit the IRS site.

The Internal Revenue Service agency’s 2014 guidance didn’t answer all relevant questions. And, unfortunately, the crypto market has become far more complex in the last few years.

Some highlights are: the tax liabilities created by cryptocurrency forks; the accepted ways of valuing cryptocurrency received as income (from an employer who offers it); and especially how you can calculate taxable gains after you’re done selling cryptocurrencies.

Hard Forks

Raise your hand if you held BTC before the Bitcoin cash hardfork in 2017. If you held BTC then chances are high you got an equivalent amount of bitcoin cash after the hard fork. But the 2014 IRS guidance had no clue how to tax you on it, or even if they could. Then hardforking became all the rage -- hundreds of coins got hardforks. Most lost value. But some kept value or gained. So if you sold it … did you make money?

The new guidance says new cryptocurrencies emerging 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.”

Get More Knowledge: The  Best Crypto Services You Should Use

In other words, you’ve incurred tax liabilities as soon as the new cryptocurrencies are recorded on a blockchain. Of course, you need to have control over the coins and the ability to spend them. If an exchange took all your hardfork coins and kept them -- no issue. 

The document reads:

“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.”

In short, you’ll be assessed income when you receive the asset.

Cost basis / Fair Market Value

The new IRS document also gives clarification on how you and other taxpayers can determine the cost basis, or fair market value of coins from a salary, mining, or the sale of goods and services.

First, you’ll want to sum up all the money spent to get your crypto, “including fees, commissions and other acquisition costs in U.S. dollars.”

Then determine the cost basis of each unit of crypto disposed in a taxable transaction (such as a sale of a mining rig in exchange for crypto).

This is helpful because you might buy bitcoin in multiple transactions -- sometimes over a span of years. When you sell it, which purchase price should you use for calculating taxable gains?

If you buy your crypto on a peer-to-peer exchange or a DEX, you can use the crypto price index to determine the fair market value. The IRS says you can 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.”

When selling your crypto, you can identify the coins you are selling, “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.

This information, the document states, should list:

“(1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”

The new guidance goes on to state that it allows for “first-in, first-out” accounting. Or you can specify when the cryptocurrencies being sold were bought.

So for example, if you bought 1 crypto at $5,000 and a second crypto at $2,000 but then sold one -- you can either identify the unit and trace its original price or use ‘first-in, first-out.” The first in and first out method means sometimes you can show a capital gain and sometimes you can show a loss.

Finally

If you like to spend your coins on everyday purchases like cups of coffee, the IRS specifically asks you to report each and every transaction. 

Even a cup of coffee must be reported as a capital gain or loss, which should be calculated as “the difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged.”

Yes, that is quite burdensome. But what can we do? It’s the IRS.

Posted by R.R. Hauxley

R.R. Hauxley traveled around the world ... 1 year on 1 Bitcoin. 20 countries, 12 months, 1 Bitcoin. He wrote a book about it: Stolen Wallets and Where to Buy Them. Along the way he met and interviewed the sharpest, brightest minds in crypto today: Vitalik Buterin, Charlie Lee, and more. Today Rafael educates the crypto curious and delves further into the incredible world of blockchain.

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