IRS or International Revenue Service is the revenue service of the United States federal government. It first launched tax guidance on cryptocurrency in 2014 leaving so many questions unsolved. As a result of this, members of the industry have been waiting for a new update solving those questions.
After a long anticipation, their intension came to light. IRS just launched a new Tax guidance. The guidance talks about the acceptable methods for valuing cryptocurrency received as income and calculation process of taxable gains at selling cryptocurrencies. The guidance also said the tax liabilities created by cryptocurrency forks.
The forks should be recognized as an ordinary income tantamount to the fair market value of the new cryptocurrency at receipt that means tax liabilities will be charged after new cryptrocurrencies are recorded on a blockchain.
On the off chance you don’t receive any new cryptocurrency even after your cryptocurrency went through a hard fork, you don’t have taxable income. The language of IRS may make more confusion because the latest updated guidance talks about gains, calculating basis, losses. And it is hard to understand the nature of airdrop and hard forks.
But still a problem remaining in the new guidance, third parties can create tax reporting obligations for you through forking a network whose coins you own. As a result, someone balefully airdrops and tags you with a huge liability. But fact is that, one would be liable for new income according to fair market value of the asset at receipt. Holders of the original bitcoin and ethereum might automatically demand a like amount of the new coins but it’s opaque under what conditions they would owe taxes on the windfall.
The document updated by IRS talks about cost basis, should be calculated by adding all the money spent to acquire the crypto, for example from mining or sale of goods and services. Another issue included in the document is the way of determining the cost basis of each unit of cryptocurrency that is disposed of in a taxable transaction. The value of the crypto purchased on an exchange is determined by the amount the exchange sold it for in U.S. dollars.
If needed crypto price index can also be used with an eye to determining the fair market value. The IRS said,
‘’When selling crypto, taxpayers can identify the coins they are disposing of,’’either by documenting the specific unit’s unique digital identifier showing the information for all units’’ in a single account or address.’’
The guidance also allows for ‘’first-in, first-out’’ accounting or the identification of specific time of acquirement of cryptocurrency after sold.
IRS would not create an exemption for transactions below a certain threshold. Capital gain or loss should be calculated as the difference between the fair market value of the services you received and adjusted basis in the virtual currency exchanged.