The United States Internal Revenue Service (IRS) has published the first guide in five years to calculating taxes on cryptocurrency transactions, as well as when receiving new coins as a result of forks and distributions by developers.
Industry participants have been eagerly awaiting leadership since May 2019, when IRS Commissioner Charles Rettig said the agency was working to provide new recommendations.
As expected, the guide published on Wednesday discusses tax liabilities created during fork of cryptocurrencies, acceptable methods for assessing cryptocurrency received as income, and the issue of calculating taxable profits from the sale of cryptocurrencies.
The management solves the long-overdue issue regarding cryptocurrencies that appeared as a result of forks. The document says that new cryptocurrencies created from a fork of the existing blockchain should be considered as “ordinary income equal to the market value of the new cryptocurrency at the time of its receipt.”
In other words, tax obligations will be applied when new cryptocurrencies are recorded on the blockchain, if the taxpayer actually controls the coins and can spend them. The document says:
“If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through the distribution of coins or some other type of transfer, you do not have taxable income.”
The problem of fork coin taxation has become more visible in recent years, as the struggle for protocol changes caused a split in various cryptocurrency communities, which led to the branching of networks and the emergence of Ethereum Classic, Bitcoin Cash and many other copies of the main cryptocurrencies.
The owners of the original bitcoin and ether can automatically receive rights to new coins, which raises the question of under what conditions they should pay taxes in case of unexpected profits. Apparently, the new management brings some clarity to American investors. However, according to Coin Center CEO Jerry Brito, the IRS wording could be even more confusing.
“Although the new management offers some much-needed clarity on certain issues regarding the basics of calculation, profit and loss, it does not fully clarify the situation with hard forks and free giveaways,” Brito said. “One of the unpleasant consequences of this guideline is that third parties can now create tax reporting obligations for you by simply branching out a network of coins you own or by imposing an unwanted free distribution of coins on you.”
Lawyer Drew Hinkes notes that individuals will only be able to measure income when they receive the asset.
“The acquisition of an asset is determined by“ ownership and control ”… it is the ability to transfer, sell, exchange or dispose of the asset,” he said. “The problem is that someone can maliciously give out coins for free and thus force you to take on huge responsibility. But this fear is a little overestimated, because you will only be responsible for new income based on the fair market value of the asset upon receipt, and most fork coins cost very little at the beginning. ”
Asset base price
The new IRS also offers a long-awaited explanation of how taxpayers can determine the value base or “fair” market value of coins received as income, for example, from mining or selling goods and services.
The base price of the asset should be calculated by summing up all the money spent on the purchase of cryptocurrency, “including fees, commissions and other costs of the acquisition in US dollars”.
The third key issue addressed in the new IRS guide is how to determine the base value of each unit of cryptocurrency spent in a taxable transaction (such as a sale). This is a problem because someone can buy bitcoin as part of several transactions over several years, and then partially sell the asset. It was previously unclear what purchase price to use for calculating taxable profit.
The cost of cryptocurrency purchased on the exchange is determined by the amount for which the exchange sold it, in US dollars. The revenue base in this case will include commissions, fees and other expenses for the purchase.
If cryptocurrency is bought on a P2P exchange or decentralized exchange, you can use the cryptocurrency price index to determine fair market value. According to the IRS, for this, you can use “a blockchain browser that analyzes global cryptocurrency indices and calculates the price of a cryptocurrency at an exact date and time.” The document states that this information should show:
“(1) the date and time when each unit was acquired; (2) the underlying value of the asset and the fair market value of each unit at the time of acquisition, (3) the date and time that each unit was sold, exchanged or otherwise liquidated; and (4) the fair market value of each unit upon sale, exchange or disposal , as well as the amount of money or the value of property received for each unit. ”
Having disappointed cryptocurrency users who like to spend their coins on everyday purchases, the IRS specifically stated that it would not create an exception for transactions below a certain threshold.
Making a cryptocurrency payment for services will result in an increase or loss of capital, which should be calculated as “the difference between the fair market value of the services you received and your adjusted underlying asset price.”
Purchases of goods and services were taxed when the IRS issued its initial guidance in 2014, which stated that digital currencies should be treated as property rather than currency for tax purposes. This reduced the desire to use cryptocurrencies for everyday spending and made the tax season burdensome for users who wanted to honestly report on their transactions.
Recall that in August of this year, the IRS began
pursue traders for false information about cryptocurrency earnings. In July, it also became known that the U.S. Internal Revenue Service plans to develop more sophisticated ways to track traders who shy away from paying taxes on cryptocurrency earnings.