IRS issues additional guidance on tax treatment for cryptocurrency • Hacker News Board

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#41

Post by nullc » Wed, Oct 09, 2019, 8:27 PM UTC

modeless wrote: post #35

nullc wrote: post #26

Earlier quoted context omitted.

> 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 stu…

Except in the situation where the HF coin gets the original ticker or the very rare situation that there is a liquid futures market in advance of the fork (has only arguably happened once that I'm aware of) there is no market value at the time of the fork-- the fork happens at an instant, and the asset cannot be traded at or before that instant.

A market value might well be established in the hours or days after, but it isn't always.

In cases where the newly created cryptocurrency immediately carries the market there is an unambiguous value for the new system (and the original cryptocurrencies value becomes ambiguous), but applying income tax to the new asset there leads to absurd results.

I agree that the ruling seems to generally support some aspects of one of the most obvious conclusions in the simplest of cases, but it fails to meaningfully clarify the application... and also suggests some absurdities that almost no one was expecting.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#42

Post by bilbo0s » Wed, Oct 09, 2019, 8:28 PM UTC

wmf wrote: post #23

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…

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.

Yeah. I'd encourage everyone to check with tax attorneys to be sure because klodolph's interpretation seems a bit suspect at first blush. Check with an attorney, or preferably two, just to be sure because the consequences for getting this wrong are nontrivial.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#43

Post by onlyrealcuzzo » Wed, Oct 09, 2019, 8:28 PM UTC

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.

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.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#44

Post by lostmsu » Wed, Oct 09, 2019, 8:28 PM UTC

tathougies wrote: post #37

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?

Same as dollar. E.g. you are not taxed, if dollar aporeciates.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#45

Post by chanfest22 » Wed, Oct 09, 2019, 8:29 PM UTC

Here's a summary of the key updates in the new guidance in ELI5 terms: https://www.cointracker.io/blog/new-irs-cryptocurrency-tax-g...

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#46

Post by jrockway » Wed, Oct 09, 2019, 8:31 PM UTC

aazaa wrote: post #16

The "airdrop" terminology is interesting to say the least. The closest thing I can see to a definition is in 26 CFR 1.61-1: > An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. A hard fork followed by an airdrop results in the distribution of units of the new cryptocurrency to addresses containing the legacy cryptocurrency. However, a hard fork i…

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.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#47

Post by modeless » Wed, Oct 09, 2019, 8:32 PM UTC

draaglom wrote: post #6

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…

People are speculating this is for e.g. when your coins are at an exchange; the currency hard forks; and the exchange does not (yet) implement the fork so you can't access the coins.

No, that's handled separately. You're not in possession of the coins if you can't access them, and you aren't taxed on them until you gain possession.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#48

Post by dragonwriter » Wed, Oct 09, 2019, 8:37 PM UTC

jkepler wrote: post #40

dragonwriter wrote: post #27

Earlier quoted context omitted.

> 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.

I think it's the most reasonable reading of the guidance, but I would agree that it would be vastly superior if this (or some other treatment) was made quite explicit. Guidance should do a better job of guiding.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#49

Post by nullc » Wed, Oct 09, 2019, 8:37 PM UTC

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…

Sorry, You've misunderstood my comment.

Some people, like the person I was responding to, are looking at Situation 1 in the ruling as saying that when a fork happens and there are two cryptocurrencies and you didn't receive any additional "new" cryptocurrency (just two, now independently spendable, copies of cryptocurrency you already had) that taxes aren't owed.

They adopt this reading in part because the only other interpretation of Situation 1 is that it's talking about an irrelevant and uninteresting case.

They imagine that you only owe taxes if in addition to the coins copied by the fork you also receive additional "air drop" units, Situation 2's 'owned 50, airdropped 25' contributes to that interpretation.

They think in situation 1 you have 50 coins of M and 50 coins of N and owe no taxes, and in situation 2 you have 50 coins of R and 75 coins of S and owe taxes on 25 S.

I think this interpretation doesn't work well, both because it's totally silent on the cost basis of the copied coins and because of the text at the top of page 5.

As a separate problem with this ruling, if you do adopt the view that when a fork comes into existence you "received" coins, there is usually no fair market value at that time because the coins were not tradable in any way until later. In some cases seen so far one side of the fork or another doesn't become effectively tradable for months, we may eventually see examples where a market doesn't form for years.

[In a few cases there is potentially a FMV at fork time, e.g. when there were liquid futures markets ahead of the fork (has only happened even arguably once, AFAIK), or when many market participants decided to give the new asset the old asset's ticker.]

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#50

Post by prolixus » Wed, Oct 09, 2019, 8:38 PM UTC

shiado wrote: post #38

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.

The guidance does have a defintion of ownership: "Under § 61, all gains or undeniable accessions to wealth, clearly realized, over which a taxpayer has complete dominion, are included in gross income."

If you are the sole possessor of a private key which grants control of a cryptocurrency address then you have complete dominion over the crypto at that address. Under situation 2 of the guidance: "B has dominion and control of Crypto S at the time of the airdrop, when it is recorded on the distributed ledger, because B immediately has the ability to dispose of Crypto S."

Taken in the most taxpayer hostile interpretation that means that if the ledger is duplicated you have income because you have the ability to dispose of the forked coin with your private key even if you have no desire to touch it in any way.