IRS Release Guidance of Tax Obligations for Cryptocurrency

Matty-Sways

On Wednesday the IRS offered formal guidance on cryptocurrencies like Bitcoin, it was the first time since 2014.

The IRS has for the first time in 5 years offered guidance on cryptocurrencies. It came in the form of a 'Frequently Asked Questions' documents.

According to Katya Fisher, a cryptocurrency attorney at Greenspoon Marder in New York, the long-awaited IRS document clarifies that digital currency is taxed under the same rules as any other property.

"Anyone who understands the tax code shouldn’t find anything in here shocking or new. If you understand capital gains and how property is taxed, this is just a plain English iteration of those concepts," says Fisher.

In a blog post, the Washington DC-based Coin Center declared the IRS document raised "messy" new questions, especially around the issue of so-called "airdrops" and "hard forks", shop speak for a situation where new types of cryptocurrency are delivered to a user.

According to the IRS, the occurrence of an airdrop or hard fork triggers a tax obligation when someone has "dominion or control" over the new currency. This creates an interesting situation because it obligates the receiver to pay taxes on something they never asked for.

This clarification and situation could cause millions of customers at crypto exchanges like Coinbase to incur tax obligations when they receive new currencies. Earlier this year Coinbase distributed an obscure spin-off currency called Bitcoin SV to every customer who owned Bitcoin. Coin Center declared this to be a "bad" situation, though not everyone agrees. According to attorney Preston Byrne, "stealth tax" liabilities won't arise, because people can always reject unwanted property.

The new IRS guidance also failed to address whether small cryptocurrency transactions are covered by "de minimis" exemptions. According to Fisher, the IRS doesn't make de minimis exemptions for other types of property so it shouldn't be expected to do so for crypto. Nonetheless, she says law-abiding tax payers shouldn't fret over unreported $5 transactions.

More broadly, Fisher says cryptocurrency is clearly on the radar of the IRS and will remain so in the future.

"IRS has been paying careful attention to digital assets because it's revenue for the U.S. government and because the IRS is concerned about the erosion of the tax base—even if cryptocurrency is a small part of the economy," she says.

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