What The IRS Says About Cryptocurrency
With an ongoing focus on regulating and taxing the cryptocurrency sector, the Internal Revenue Service (IRS) of the United States has issued two new guidelines for taxpayers. The new guideline covers some of popular subjects related to cryptocurrency usage, including digital asset transactions, airdrops, and hard forks.
The first document, titled ‘Revenue Ruling 2019–24’, is focused on airdrops and hard forks. The second document comes in a Frequently Asked Questions (FAQ) format and explains general cryptocurrency terms as well as a series of use cases to guide taxpayers on their duties.
Airdrops and Hard Forks — Taxable
The Revenue Ruling 2019–24 defines an ‘airdrop’ as an event in which a company distributes cryptocurrency tokens to digital wallets for users who are interested. The distribution is entirely free as the company applies no additional charges.
In the case of hard forks, the term represents an event where a blockchain network experiences a protocol change and diverts into a new network. The event occurs in cases where blockchain developers seek to bring changes to an existing protocol, but cannot convince the original development team to apply them. For that reason, blockchain developers create an updated version of the original network, which keeps all information stored in the original blockchain, including the transaction history.
While there are different types of ‘forks’, the IRS guideline is mainly focused on the hard ones. An example of a hard fork is Bitcoin Cash in 2017. When developers couldn’t apply changes to the original Bitcoin network to improve transactions speed and its capacity to scale, a hard fork was conducted and BCH was born.
But… Why is the IRS suddenly interested?
Believe it or not, there’s a link between airdrops and hard forks. Ideas? That’s correct. Both events offer cryptocurrencies for free to holders. If an individual holds a certain amount of Bitcoin prior to the hard fork, he would receive the exact same sum of Bitcoin Cash in the new blockchain network for no cost.
Yet, the IRS views hard forks and airdrops as different events, despite having the same monetary outcome. The agency considers that both events are taxable and should then be reported to the IRS as ‘gross income’.
Time To Answer Some Questions
Back in 2014, the IRS released a FAQ titled ‘Notice 2014–21.’ The document described general events in the cryptocurrency sector and include a guide on how an individual should act in order to keep his activities on a legal side. While the original document contained 16 questions, the freshly released version addresses 43 questions.
Regulating the cryptocurrency industry is a challenge. Not only for the IRS, but for regulators all over the world. In most cases, cryptocurrencies are designed to be operated without government interference, which makes them hard to track. Nevertheless, the IRS seems to be up for a the challenge and has been clear on its goal to regulate the industry and offer stronger protection to U.S. investors.
At the very start, the new FAQ document begins with a simple definition of a virtual currency and the difference between them. Additionally, the IRS explains in a legal manner how the new classes of digital assets are processed tax-wise.
The document also enlightens taxpayers on how to file their losses or gains related to cryptocurrencies. Interestingly, the IRS considers that gifted cryptocurrencies are not subjected to any tax. However, the assets will be taxed as a source of income the moment the individual trades or cashes out the digital assets.
Furthermore, the document emphasises that all events, transactions, gains, and losses should be recorded despite their significance. The agency states that documentation (receipts, exchanges, and sales) is needed for the taxation events to be valid.
Stronger pressure for cryptocurrency investors?
As a new bull run cycle gets closer, institutions and agencies continue to issue new regulations, both positive and negative. The IRS has taken a more aggressive stance, sending letters to almost ten thousand U.S. investors who have failed to report their cryptocurrency incomes.
In the past, most investors have gotten away without having to pay taxes. However, as big players like Facebook and Telegram try to get into the cryptocurrency market, regulators all over the world have began to reinforce their postures on the matter and issue new regulatory frameworks — some clearly better than others.
