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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

#131

Post by zjs »

arcticbull wrote: post #94
modeless wrote: post #58

Earlier quoted context omitted.

> The more I look through this ruling, the more it seems like it is only designed for people who hold their cryptocurrency at an exchange. I think you're absolutely right. The guidance only makes sense through this lens. It's unfortunate that the IRS didn't base their reasoning on the technical characteristics of the underlying blockchains. There is a whole lot of ambiguity as a result.

Nah, it's just up to you to justify the value of the asset when it forks. Frequently that's $0. If it's a meaningful fork, like BTC/BCH/BSV you could easily use the value at listing on the first exchange as the cost basis, as that's what everyone else will do in lieu of a 409(a) type valuation, which of course doesn't exist because crypto doesn't have intrinsic value. It just means more legwork for you. This is also…

I'm not sure if numbering is stable (so perhaps this was A24 at one point), but I find this the most relevant portion of the FAQ:

Q27. I received cryptocurrency that does not have a published value in exchange for property or services. How do I determine the cryptocurrency’s fair market value?

A27. When you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, then the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs.

If there is not [yet] a published value at the time of the airdrop, A27 seems to suggest that "the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs". If you received the cryptocurrency in exchange for nothing, I'd conclude that the fair market value was $0.

(IANAL, IANYL, YMMV, etc.)

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#132

Post by zjs »

I think this is the first time that the IRS has explicitly stated that specific identification is a valid accounting method for virtual currency:

Q36. I own multiple units of one kind of virtual currency, some of which were acquired at different times and have different basis amounts. If I sell, exchange, or otherwise dispose of some units of that virtual currency, can I choose which units are deemed sold, exchanged, or otherwise disposed of?

A36. Yes. You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.

Q37. How do I identify a specific unit of virtual currency?

A37. You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address. This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.

Note, however, that they also clarify that this is not the default accounting method:

Q38. How do I account for a sale, exchange, or other disposition of units of virtual currency if I do not specifically identify the units?

A38. If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out (FIFO) basis.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#133

Post by mths »

gamblor956 wrote: post #113
jron wrote: post #101

Earlier quoted context omitted.

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.

Quickly, what's X*0?

I'm aware that there's situations where a CGT event occurs even without selling your asset, but this shouldn't be one of them.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#135

Post by [deleted] »

norswap wrote: post #20
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…

Don't you automatically "receive/gain" the new currency upon a hard fork? Or am I misunderstanding these words?

[deleted]

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#136

Post by traviscj »

toast0 wrote: post #65
jrockway wrote: post #46

Earlier quoted context omitted.

I think I got a Stellar "air drop" through Keybase. I don't even want their fake money, but now I have to do extra paperwork to deal with it. I am surprised that McDonalds can offer you 50 cents off a burger without having to file a 1099.

> I am surprised that McDonalds can offer you 50 cents off a burger without having to file a 1099. A discount is not income. If they gave you a $0.50 gift card though, that's taxable income, and they should collect a W-9, and file a 1099 if the total of annual amounts adds up to $600 or more; as a recipient, you're required to include it in your income regardless of if the originator filed a 1099 or not.

This guy taxes.

In seriousness, though, how do you build up this level of comfort/familiarity with the tax code? Did you do it professionally?

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#137

Post by baobabKoodaa »

arcticbull wrote: post #86
baobabKoodaa wrote: post #80

Earlier quoted context omitted.

A dividend is not "new value" or "unrelated to your ownership stake". If you hold stock worth $100 and you get a $2 dividend, value of the stock drops to $98. Just like a stock split, or a cryptocurrency hard fork: before the event you had some assets worth $100 and after the event you have some assets worth $100. (Plus some -- mostly random -- fluctuation in asset prices.)

You are correct it’s not new value per se, I was sort of glossing over that. A dividend is in fact unrelated to your ownership stake. Before a dividend and after a dividend, you continue to own the same percentage of the underlying entity. You could use the dividend to in fact increase your beneficial ownership stake by re-investing it in the security. What has changed is the market value of your shares -- and to you…

Hard forks can not magically create money out of thin air. If the "new" chain has some value post-fork, that value has been siphoned off the "old" chain (technically neither is "new" or "old" relative to each other, but bear with me for a minute).

Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like_ this has been happening in past 2 years. It's an example of irrational market behavior. There is no* reason hard fork should create value.

*Sibling comment is also correct. A hard fork may create value by separating two entities which can thrive separately better than they can together. Similar to how a company that is shelling out dividends may be more valuable than a company which hoards cash.

However, in a rational market this information would be incorporated into prices _before_ the hard fork: there is still no rational reason for the total price of assets to magically jump after the event.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#138

Post by belltaco »

baobabKoodaa wrote: post #137
arcticbull wrote: post #86

Earlier quoted context omitted.

You are correct it’s not new value per se, I was sort of glossing over that. A dividend is in fact unrelated to your ownership stake. Before a dividend and after a dividend, you continue to own the same percentage of the underlying entity. You could use the dividend to in fact increase your beneficial ownership stake by re-investing it in the security. What has changed is the market value of your shares -- and to you…

Hard forks can not magically create money out of thin air. If the "new" chain has some value post-fork, that value has been siphoned off the "old" chain (technically neither is "new" or "old" relative to each other, but bear with me for a minute). Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like…

>If the "new" chain has some value post-fork, that value has been siphoned off the "old" chain

Not necessarily. I don't see how that follows at all.

>Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like_ this has been happening in past 2 years. It's an example of irrational market behavior. There is no* reason hard fork should create value.

How does that matter to the IRS whether market is being irrational or rational?

>However, in a rational market this information would be incorporated into prices _before_ the hard fork: there is still no rational reason for the total price of assets to magically jump after the event.

The crypto market is full of hype and irrational actors

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#139

Post by smallnamespace »

baobabKoodaa wrote: post #137
arcticbull wrote: post #86

Earlier quoted context omitted.

You are correct it’s not new value per se, I was sort of glossing over that. A dividend is in fact unrelated to your ownership stake. Before a dividend and after a dividend, you continue to own the same percentage of the underlying entity. You could use the dividend to in fact increase your beneficial ownership stake by re-investing it in the security. What has changed is the market value of your shares -- and to you…

Hard forks can not magically create money out of thin air. If the "new" chain has some value post-fork, that value has been siphoned off the "old" chain (technically neither is "new" or "old" relative to each other, but bear with me for a minute). Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like…

Here's a reason: the market was unsure whether the fork would happen until the moment of voting.

Let's say the chain is worth $100 unforked and the value of forking is $10. The value might be $105 if the market only thinks forking is 50% likely, and can remain uncertain depending on how much voting information leaks out. If the fork succeeds, value jumps to $110.

I'm not making this up out of whole cloth either, merger arbitrage funds make a living on these price jumps in equities.

As a meta comment, it's probably unwise to make such sweeping negative claims in a field as varied and immature as economics/finance. You'll always find broad exceptions, since the definitions are all made up by humans out of convenience.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#140

Post by toast0 »

traviscj wrote: post #136
toast0 wrote: post #65

Earlier quoted context omitted.

> I am surprised that McDonalds can offer you 50 cents off a burger without having to file a 1099. A discount is not income. If they gave you a $0.50 gift card though, that's taxable income, and they should collect a W-9, and file a 1099 if the total of annual amounts adds up to $600 or more; as a recipient, you're required to include it in your income regardless of if the originator filed a 1099 or not.

This guy taxes. In seriousness, though, how do you build up this level of comfort/familiarity with the tax code? Did you do it professionally?

No professional experience. I'm intrigued by systems of rules with exceptions, and I have pretty good recall for random, mostly useless data. (It's a useful collection in aggregate). Some amount of motive to minimize taxation; the tldr there is if you wanted a super awesome charitable trust, open it in the 80s; and maybe try to figure out how to get startup stock into a Roth account before it's worth much, but this requires prescience to know it's worth the effort. I think there are some brokerages that could offer enough flexibility to do it, but I only looked into it much too late.

I read bogleheads forums and tax questions are usually interesting to me. I don't like filing my tax returns without understanding why everything is where it is.

All that said, discounts aren't income comes up in the context of "why aren't cash back credit cards taxable, but account opening bonuses are" which also touches on 1099 rules because people complain about bank X issuing 1099s for all the bonuses, even when they aren't near the reporting limit. A quick search to verify that gift cards count as income (because they're considered cash equivalent) also reminded me of the name of the W-9 form.

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