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IRS issues additional guidance on tax treatment for cryptocurrency

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Re: IRS issues additional guidance on tax treatment for cryptocurrency

#111

Post by ThrustVectoring »

floatingatoll wrote: post #13

If you hold pre-fork currency, and there is a hard fork: IF you gain any of the new currency THEN it's income ELSE it's not. To quote the final paragraph, emphasis mine: https://www.irs.gov/pub/irs-drop/rr-19-24.pdf HOLDINGS (1) A taxpayer does not have gross income under § 61 as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency . (2) A taxpay…

This should result in differences in tax treatment between exchange-held and wallet-held balances.

If you hold it in a wallet, you have one asset that is dividable into two parts, each transactable on different blockchains. If you hold it on an exchange, you have the right to receive an asset on one blockchain, and after the fork the exchange credits you the right to receive an asset on another blockchain.

These are different events. Arguably, all exchange balances in new blockchains are basically "airdrops" of new economic rights. It's not directly held assets, but rather an abstraction over it, and this abstraction is different. If the exchange wants to, it can refuse to give you airdropped or hardforked assets on "your" crypto.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#112

Post by gamblor956 »

stale2002 wrote: post #102
nullc wrote: post #97

Earlier quoted context omitted.

Can you explain what the first couple lines about situation 1 on page 5 mean, according to your interpretation?

Sure, In situation 1 is says the following: "A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A." So I interpret the line "Crypto N is not airdropped or otherwise transferred", too mean that there are no additional transa…

You are reading it wrong.

There does not need to be a transaction on any ledger for the receipt of the forked coins to be income.

What makes them income is that you received the forked coins, whether that fork is a true fork or just a new ledger that is otherwise identical to the old one. The IRS doesn't care about those technical details.

Situation 1 would apply if for example you choose not to receive the forked coins or if for some reason your exchange didn't recognize the fork and thus never credited any new fork coins to you.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#113

Post by gamblor956 »

jron wrote: post #101
tuesdayrain wrote: post #95

Earlier quoted context omitted.

In my opinion it doesn't make sense to pay taxes on a fork until you sell it and realize the gains. Otherwise do you pay taxes a second time when you do sell it?

I agree. The IRS should simply mandate that forked coins have a purchase price of 0 USD. When sold, the tax event occurs and the seller simply pays the short term or long term realized gain.

They do have a purchase price of $0. That's exactly why it's taxable income.

If you had to pay market value for the forked coins they wouldn't be taxed when you received them.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#114

Post by pliao39 »

arcticbull wrote: post #87
zone411 wrote: post #81

Earlier quoted context omitted.

An even better analogy would be a company splitting itself into parts. Gap will do it in 2020 for example.

Maybe, but when Gap splits up some assets go to one, some assets go to the other. When a coin forks, someone just hits copy-paste and lists it on an exchange. No assets are transferred, no value changes hands, because there's no intrinsic value to a crypto asset. A gap split-up yields no intrinsic change in value, just like if I take $100 and put it into 2 piles. This is more akin to my forking the GitHub repo for My…

Ah, yes, this is good nuance, but I would like to argue that there are intangibles that can be replicated across Gap's future spinouts. There will be aspects of the culture, certain processes, relationships, and perhaps even software, that will be instantly DUPLICATED the moment the company splits!

And remember, the value of a chain is not simply its code. In fact, you can argue that the code is NOT important AT ALL to the value of a chain, for the very reason that it is entirely open. The chain's valuation comes from the network - and arguably the most important of those (at least in the short term) - the users who transact on the chain, and the miners whose hash power push the chain forward, will splinter.

When a chain splits, the miners must make a decision on what percentage of their finite hash power should be allocated to each fork.

I'm actually of the belief that this analogy is VERY good.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#115

Post by gamblor956 »

scarejunba wrote: post #21
lacker wrote: post #17

So if you get a new coin from a hard fork, you owe taxes on the fair market value of that new coin you get. This seems pretty dangerous - if the fair market value is high on the first day of trading, but declines a lot, you could get taxed on value that you never realized. It seems like this will incentivize people to sell off new tokens immediately, in order to pay the taxes they incurred during the fork. To me it s…

Interesting so if I make a coin, airdrop it to you guys, and enforce only a single sale of one coin for a million dollars to my friend and from him back to me, then leaving the chain untransactable, you're all on the hook for 1 million dollars worth of coin but can't sell it? Fascinating.

Your victims can choose not to accept receipt of the coins you send them.

Also, if the coin is not transactable it has no value.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#116

Post by gamblor956 »

nullc wrote: post #60
onlyrealcuzzo wrote: post #43

Earlier quoted context omitted.

No. For the same reason you can't create stock in a company and mail people shares, rack up a bunch of debt, and have random people liable for part of the debt. Just because someone "gives" you something, doesn't mean you accepted it and own it.

Can you relate your position back to the text of the ruling? Particularly where it references Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955)? The standard they are appearing to apply is "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion".

From the example just above, the scam coin is neither realized nor does the recipient have complete dominion.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#117

Post by stale2002 »

gamblor956 wrote: post #112
stale2002 wrote: post #102

Earlier quoted context omitted.

Sure, In situation 1 is says the following: "A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A." So I interpret the line "Crypto N is not airdropped or otherwise transferred", too mean that there are no additional transa…

You are reading it wrong. There does not need to be a transaction on any ledger for the receipt of the forked coins to be income. What makes them income is that you received the forked coins, whether that fork is a true fork or just a new ledger that is otherwise identical to the old one. The IRS doesn't care about those technical details. Situation 1 would apply if for example you choose not to receive the forked co…

It specifically calls out "record on the ledger", though.

I don't know what it would even mean to have a "hard fork" which does not maintain the previous state of the blockchain.

Like, would that be talking about lite-coin, and arguing that it is technically a "hard fork" of Bitcoin?

Or would it be a "hard fork" which sets everyones balance to 0, but still maintains the old blocks from the fork? (For some unknown reasons...)

Both of those seem weird.

The document specifically calls out things that are recorded on the digital ledger though.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#118

Post by sokoloff »

arcticbull wrote: post #71
tehlike wrote: post #70

Earlier quoted context omitted.

The problem is you might technically incur a lot of loss which you will have to carry on for unforeseeable future.

Indeed, as you would incurring a capital loss in any other asset class. As such, you should recognize that loss in the same tax year as the fork occurred, which is why I believe the selling pressure would be towards the tail end of the tax year whether the price goes up (to cover taxes on the distribution) or down (to recognize and true up losses). If you did that in the same tax year as the fork, you'd never have to…

You can still suffer if the fork forces you to realize a gain as short term capital gain (higher tax rate than long term capital gain).

I expect this ruling to be challenged and ultimately settled in Tax Court. (I have zero investments in crypto, so no dog in the fight, but this seems patently unjust to me.)

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#120

Post by nullc »

stale2002 wrote: post #102
nullc wrote: post #97

Earlier quoted context omitted.

Can you explain what the first couple lines about situation 1 on page 5 mean, according to your interpretation?

Sure, In situation 1 is says the following: "A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A." So I interpret the line "Crypto N is not airdropped or otherwise transferred", too mean that there are no additional transa…

Thanks for your read on it. Okay, now -- later you sell those Crypto N coins. What is your cost basis? You also sell the M coins, whats the cost basis there?

[FWIW, I think the way you're reading it has fewer absurd effects, I'm just struggling to convince myself that they actually meant what you're describing.]

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