IRS Policy Update on Crypto

Cryptoworth Official
Nov 7 · 3 min read

Recent IRS Guidelines on Cryptocurrency Taxation

On October 9th, 2019 new taxation guidelines under Revenue Ruling 2019–24 for cryptocurrency have been released by the IRS. The ruling covers how to treat tax liabilities on cryptocurrency hardforks and airdrops as income and how to treat taxable gains from the sale of cryptocurrency. The new ruling is the most recent IRS update on cryptocurrency taxation since Notice 2014–21.

Here is the highlight from the new IRS guidelines.

All cryptocurrency distributed as a result of a hardfork or airdrop is tax liable at the fair market value of the time of reception.

Cryptocurrency Hard Forks & Airdrops

Hardforks occur often without the choice of those holding the particular cryptocurrency being forked. In this case, token holders that receive the new cryptocurrency with value are gaining income in the eyes of the IRS and must report the tax event.

Airdrops are considered taxable events as well at the moment of reception by the token holder, regardless of consent. The IRS expects airdrop recipients to report these taxable events.

Soft Forks

Since Soft Forks occur without a diversion of a distributed ledger upon a protocol change, no new cryptocurrency is created as a result. Given the previous details mentioned, the IRS does not consider soft forks a taxable event.

Payments

Any income generated in the form of cryptocurrency or cryptocurrency used to purchase goods and services are subject to a capital gain or loss event. The gain or loss event is determined by the equivalence to the difference between the cost basis and fair market value at the time of disposition.

Gifts and Donations

Cryptocurrency received as a gift is not considered income. The basis of the cryptocurrency gift received is dependent on the gain or loss at the time of disposal.

Donations made in the form of cryptocurrencies do not trigger a gain or loss. If cryptocurrency assets are held for over one year, eligibility is established for a deduction equal to the fair market value at the date of donation. If cryptocurrency assets are held for one year or less, eligibility is established for a deduction equal to the lesser of the fair market value or the cost basis of the date of donation. Capital gains taxes are voided when appreciated cryptocurrency assets are donated to charity.

Issues with the new IRS Policy

The main concern from the new policy is that any individual or project could essentially create their own token and launch an airdrop, creating a significant tax liability to token holders and investors. Fortunately, most tokens derived from airdrops that occur are of low evaluation. If an airdrop actually produces an income for a token holder or investor, they must report the income earned from the airdrop at fair market value at the time of reception.

The Step Forward

Cryptoworth is already working on building new updates to accommodate the new IRS policy. As the industry guidelines evolve, the accounting process and how we calculate our taxes must be flexible to change with it. Cryptoworth embraces proper compliance to regulations in the cryptocurrency space.

Disclaimer: This post is informational only and is not meant as tax advice. For tax advice please advise with a tax professional.

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