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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

#21

Post by scarejunba »

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.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#22

Post by nullc »

klodolph wrote: post #18
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…

From the FAQ: > A21. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whe…

The text of the ruling is incredibly unclear.

You could read the ruling as saying that if you have coins on both the old system and the new system that you recieved an 'air drop' and owe taxes. Or you could attempt to read it as saying that you only received an 'air drop' if there was a "transfer" and not merely state copying.

The latter interpretation is more reasonable in effect but seriously frustrated by the total lack of guidance on setting the cost basis of the resulting assets! Also the language of the ruling comes very close to directly contradicting this interpretation: "Situation 1: A did not receive units of the new cryptocurrency, Crypto N, from the hard fork;".

The former interpretation is frustrated by the absurd result that users of eth, bcash, or other centrally administered frequently hardforking cryptocurrencies would owe income tax multiple times over for every one of those coins they own... even though the original systems have largely (but not completely) been ignored, and aren't valued as much. So what, are users of those systems supposed to have over and over against recognized ordinary income for nearly the total value of their holdings and sold the original coins and taken a capital loss on them (which they couldn't deduct against their ordinary income, except in a limited way)?

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#23

Post by wmf »

klodolph wrote: post #18
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…

From the FAQ: > A21. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whe…

It's not obvious that your interpretation is right. During the Bitcoin / Bitcoin Cash fork you received new BCH, especially if you "claimed" any UTXOs on the new chain.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#24

Post by [deleted] »

nsfyn55 wrote: post #8

>A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. What does this mean for crypto players that exchanged a lot of crypto, realized gains, then lost their wallet? Are they still on the hook for taxes on the gains even though they can't access the wallet anymore?

[deleted]

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#25

Post by Scoundreller »

modeless wrote: post #5

Finally! Guidance on airdrops and forks was sorely needed. The guidance seems mostly in line with expectations, but I find one bit confusing. The IRS is drawing a distinction between a hard fork with an airdrop and a hard fork without an airdrop. I don't understand the concept of a hard fork without an airdrop. If the new chain doesn't at least maintain the balances of all existing accounts using the new chain's toke…

Quite refreshing to see. Canada’s CRA publishes some crypto guidance, but delicately avoided any discussion about forks and airdrops, which is the only thing that’s unlike any other asset that someone buys and sells that goes up or down in value.

Clarifying the parts that are already clear wasn’t too valuable. Maybe useful for a consumer that thinks “I can trade all day and never pay tax”, but nothing actionable for any accountant.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#26

Post by nullc »

modeless wrote: post #5

Finally! Guidance on airdrops and forks was sorely needed. The guidance seems mostly in line with expectations, but I find one bit confusing. The IRS is drawing a distinction between a hard fork with an airdrop and a hard fork without an airdrop. I don't understand the concept of a hard fork without an airdrop. If the new chain doesn't at least maintain the balances of all existing accounts using the new chain's toke…

> The guidance seems mostly in line with expectations,

I'm curious what expectation you feel it met?

I believe it somehow managed to provide absolutely no clarity on any of the difficult questions. And to the extent that one can attempt to apply it literally and conservatively the results are unconscionable (e.g. having to pay income tax many times over on any hardfork-prone cryptocurrency).

The only way that I can see that this met expectations is that those of us that don't own hardfork prone centrally administered assets and diligently sold fork coins ASAP and recording ordinary income for their sale won't be impacted significantly by this. But anyone who didn't do those things is now in a world of confusion.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#27

Post by dragonwriter »

nullc wrote: post #22
klodolph wrote: post #18

Earlier quoted context omitted.

From the FAQ: > A21. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whe…

The text of the ruling is incredibly unclear. You could read the ruling as saying that if you have coins on both the old system and the new system that you recieved an 'air drop' and owe taxes. Or you could attempt to read it as saying that you only received an 'air drop' if there was a "transfer" and not merely state copying. The latter interpretation is more reasonable in effect but seriously frustrated by the tota…

> The latter interpretation is frustrated by the total lack of guidance on setting the cost basis of the resulting assets!

IMO, the most reasonable interpretation without a specific basis-splitting rule, given that the IRS divides a hard fork into a legacy ledger a and a new ledger would be that the basis value for the new ledger entries (being that they are created by the fork at no cost) is zero, with the legacy ledger entries retaining their original basis value.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#28

Post by klodolph »

nullc wrote: post #22
klodolph wrote: post #18

Earlier quoted context omitted.

From the FAQ: > A21. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whe…

The text of the ruling is incredibly unclear. You could read the ruling as saying that if you have coins on both the old system and the new system that you recieved an 'air drop' and owe taxes. Or you could attempt to read it as saying that you only received an 'air drop' if there was a "transfer" and not merely state copying. The latter interpretation is more reasonable in effect but seriously frustrated by the tota…

> You could read the ruling as saying that if you have coins on both the old system and the new system that you recieved an 'air drop' and owe taxes.

The text is fairly clear on this point, that a hard fork may or may not be followed by an airdrop, because it has a separate entry for “hard fork followed by airdrop” and “hard fork not followed by airdrop”.

So if you have a hard fork, and your old coins are now on two forks, that’s not income. “Hard fork without airdrop.”

I am not sure what else “hard fork without airdrop” could possibly mean.

Agreed that the cost basis for these coins is unclear.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#29

Post by zucker42 »

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?

I would think so too. It makes me question if the IRS understands how decentralized cryptocurrencies work.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#30

Post by wmf »

nullc wrote: post #22
klodolph wrote: post #18

Earlier quoted context omitted.

From the FAQ: > A21. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whe…

The text of the ruling is incredibly unclear. You could read the ruling as saying that if you have coins on both the old system and the new system that you recieved an 'air drop' and owe taxes. Or you could attempt to read it as saying that you only received an 'air drop' if there was a "transfer" and not merely state copying. The latter interpretation is more reasonable in effect but seriously frustrated by the tota…

...total lack of guidance on setting the cost basis of the resulting assets...

"A24. If you receive cryptocurrency from an airdrop following a hard fork, your basis in that cryptocurrency is equal to the amount you included in income on your Federal income tax return. The amount included in income is the fair market value of the cryptocurrency when you received it. You have received the cryptocurrency when you can transfer, sell, exchange, or otherwise dispose of it, which is generally the date and time the airdrop is recorded on the distributed ledger. See Rev. Rul. 2019-24. For more information on basis, see Publication 551, Basis of Assets." (I realize the FAQ may not be legally binding, but there it is.)

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