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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

#31

Post by undefined3840 »

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?

No. It completely depends on how you hold your crypto. If you are storing it on an exchange it’s completely up to the exchange to credit your wallet, which they don’t necessarily have an obligation to do.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#32

Post by nullc »

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?

Depends on how you define "receive". Also "new".

If currency X is hardforks and there now exist X and X' then in all ordinary cases you have access to both X and X'. But did you receive? Your access is because X' copies/extended X's state when it came into existence. There wasn't any new transfer to you.

One part of the text sounds like it's possible to not "receive": "Situation 1: 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 CryptoN. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A."

Another part of the text describing the same facts, instead makes it sound like reception is determined by resulting control: "Situation 1: A did not receive units of the new cryptocurrency, Crypto N, from the hard fork; therefore, A does not have an accession to wealth and does not have gross income under § 61 as a result of the hard fork."

So, taking both these parts together, it sounds like situation 1 is describing an irrelevant and obvious case. It's technically possible for N to be created and copy currency M but leave out A's coins. Obviously A wouldn't owe any taxes as a result. Duh. This wasn't a case anyone was concerned with.

So what if you instead say okay, the coins you got access to via state copying were "received"-- well okay, but now in that case the many times ethereum or bcash were hardforked and the original systems were largely, but not completely, abandoned you'd then owe income tax on essentially the entirety of your holdings. 0_o

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#33

Post by [deleted] »

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.

[deleted]

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#34

Post by nullc »

Legogris wrote: post #15
gamblor956 wrote: post #4

Earlier quoted context omitted.

This just addresses the tax consequences. Theft is something else. The ruling is basically saying that if your exchange didn't support the fork, you didn't receive any crypto, so there's no taxable income. But if your exchange did support the fork, you have taxable income once those crypto show up in your exchange account and you can transact with them.

Isn't it rather that you have taxable capital gains once you choose to transact those assets?

That might be a reasonable position to take: it would nicely avoid the issue that you might not know or be able to know about the fork, that the value at the instant of creation is exceptionally unclear, and it would nicely avoid the issue that you might not meaningfully have access to the coins.

The ruling appears to say nothing like that and nothing that would particularly support that interpretation.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#35

Post by modeless »

nullc wrote: post #26
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 s…

I expected that airdrops would be ordinary income based on the market value at airdrop time. I expected that stock split rules would not apply to forks (though this may seem obvious, there were many that were arguing the opposite). I was hoping that tokens you can't access due to exchanges not supporting them or whatever don't count as income. Those are all aligned with my expectations.

I agree that the rules are stupid and have bad outcomes in many cases. But I didn't expect IRS guidance to change that. I also agree that the guidance is ambiguous on hard forks (is it an "airdrop" or not?) and that's a big problem.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#36

Post by tathougies »

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?

If you lost access to cash, perhaps you can claim it as a tax deduction, since you can claim lost or stolen cash, I think.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#37

Post by tathougies »

cft wrote: post #11

I think it's the decision to treat it as property (and not its scalability) that killed the use of crypto in the US as payment mechanism, and limited its use only to store of value, speculation, and illicit payments.

They were supposed to treat cryptocurrency as not property? How would that work?

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#38

Post by shiado »

Without a legal definition of cryptocurrency ownership there is no way to interpret this guidance. I may assert that I own the private key which can transact on the Bitcoin blockchain but also assert that I do not own the exact same private key on the Shitcoin 1234 blockchain. A very crude and simple analogy would be like assuming people with the same bank pin are the same person.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#39

Post by jkepler »

wmf wrote: post #30
nullc wrote: post #22

Earlier quoted context omitted.

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 tr…

That 'guidance' isn't clear, as its quite frequent that when a hard fork occurs, there's speculation on the value of the new chain before the split, and high volatility after the split. In a number of cases, there aren't actually functional markets allowing price discovery for the new chain; thus the IRS hasn't yet given any guidance on establishing a new chain's cost basis.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#40

Post by jkepler »

dragonwriter wrote: post #27
nullc wrote: post #22

Earlier quoted context omitted.

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 le…

Your interpretation makes sense to me. However, the problem is that the IRS didn't actually state that in their limited guidance.
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