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

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#91

Post by stale2002 » Wed, Oct 09, 2019, 10:23 PM UTC

X6S1x6Okd1st wrote: post #72

beaner wrote: post #64

Earlier quoted context omitted.

You didn't receive anything new. You already had the keys. There was simply a new client created to let you access these alternative coins. If you own bitcoin private keys, you already own coins on an infinite number of hard forks. You're just lacking a client to access them.

the IRS sees it differently.

No, it does not.

The IRS specifically refers to when you recieves the tokens, on chain, in a transaction.

If there is no additional data, in the blockchain, then it is not an airdrop, according to the IRS.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#92

Post by modeless » Wed, Oct 09, 2019, 10:27 PM UTC

nullc wrote: post #66

modeless wrote: post #53

Earlier quoted context omitted.

I hadn't considered the situation where the forked coin is the one that retains most of the value. I think in that situation I would be comfortable arguing to the IRS that the old currency is actually the fork, e.g. ETC vs ETH. The technical and legal definitions of "fork" don't necessarily have to match. I would also be comfortable using the first trading day's close as the market value rather than the instantaneous…

> I hadn't considered the situation where the forked coin is the one that retains most of the value. I think in that situation I would be comfortable arguing to the IRS that the old currency is actually the fork, e.g. ETC vs ETH. The technical and legal definitions of "fork" don't necessarily have to match. Agreed, but that appears to contradict the plain text of the ruling. It's also not guaranteed to be unambiguous…

> FWIW, the interpretation I adopted was that I've just sold fork quickly as soon as I could reasonably move them to a place to sell them, then reconized as income the value I actually received in selling them. ... at least the forks I knew about, but there have likely been other forks that I've never heard of.

Yup, I did the same. If the IRS audits us we may have to change our calculations but the absolute difference in tax owed should be small.

My understanding is that despite their reputation the IRS is usually fairly chill about this sort of thing if you demonstrate you had good intent. I hope I never have to test that though. Unambiguous guidance sure would be nice!

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#93

Post by arcticbull » Wed, Oct 09, 2019, 10:40 PM UTC

panarky wrote: post #63

lacker wrote: post #52

Earlier quoted context omitted.

I'm pretty sure the IRS considers BCH to be the new cryptocurrency in that scenario, and considers BTC holders to have "received new cryptocurrency". 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. At an exchange, the exchange officially declares which coin is the "new one" and which coin is the "old one", so that isn't a problem…

What exactly is the taxable event? When the source code for the fork is first published? When the first block is mined on the new chain? If so, then there's probably no market for the asset at that instant, so the fair market value is zero? When Ethereum hard-forked, some miners kept mining the old chain, now affectionately known as Ethereum Classic. Seems like Classic is the original asset and what we now call Ether…

> Let's say I paid $200 for 1 ETH before the fork, and after the fork I own 1 New ETH worth $195 and one 1 Classic ETH worth $5.

> Do I now owe tax on $195 even though the total value of New ETH + Classic ETH equals my acquisition cost?

Let's say for simplicity sake that all this happened within the same calendar year. Here's where you're at.

You bought 1 ETC for $200 and now it's worth $5. That's a $195 unrealized capital loss.

Let's say you acquired your ETH from the fork and it was trading at $5 when you got it. You now have 1 ETH that has a cost basis of $5. This represents a $5 realized capital gain, and a $190 unrealized capital gain.

If you disposed of everything within the same year, it would be a complete wash, as your $195 capital loss would offset your $(190 + 5) capital gain.

If you carried your positions into the next tax year, you'd have to pay taxes on the $5 your ETH was worth when the fork happened at the end of year 1. Then in year 2, you have a $195 unrealized capital loss and a $190 unrealized capital gain. This would yield a $5 net capital loss, which you could use to offset other capital gains or carry forward into future years, deductible $3000 per year for the rest of your life.

In reality what happened though is that both ETH went up and ETC went up because a fork of a currency is just a copy-paste, as they have no intrinsic value and their performance afterwards is frequently totally uncorrelated other than in the way the whole crypto "market" is correlated to BTC.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#94

Post by arcticbull » Wed, Oct 09, 2019, 10:43 PM UTC

modeless wrote: post #58

lacker wrote: post #52

Earlier quoted context omitted.

I'm pretty sure the IRS considers BCH to be the new cryptocurrency in that scenario, and considers BTC holders to have "received new cryptocurrency". 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. At an exchange, the exchange officially declares which coin is the "new one" and which coin is the "old one", so that isn't a problem…

> 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 addressed in A24 of the FAQ.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#95

Post by tuesdayrain » Wed, Oct 09, 2019, 11:11 PM UTC

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…

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?

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#96

Post by OrgNet » Wed, Oct 09, 2019, 11:18 PM UTC

kauffj wrote: post #12

In honor of the IRS fork guidance I’m announcing BBV — Bitcoin Bruce’s Vision. It’s a Bitcoin fork that gives me an extra 1 million coins. I’ll sell one sat to you for $300. Also: I’m sending a 12 word seed phrase poem to each member of Congress right before the fork. https://twitter.com/brucefenton/status/1181981988221329413

> I’m donating my million coins to charity ...and will be deducting the value of the donation ...unless of course the IRS says it’s not a real asset...

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#97

Post by nullc » Wed, Oct 09, 2019, 11:26 PM UTC

stale2002 wrote: post #91

X6S1x6Okd1st wrote: post #72

Earlier quoted context omitted.

the IRS sees it differently.

No, it does not. The IRS specifically refers to when you recieves the tokens, on chain, in a transaction. If there is no additional data, in the blockchain, then it is not an airdrop, according to the IRS.

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

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#98

Post by rsclient » Wed, Oct 09, 2019, 11:26 PM UTC

chatmasta wrote: post #57

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…

It’s pretty crazy that we’ve even gotten to the point where there is an FAQ about “hard forks” on the IRS website. You have to give the US government a certain amount of kudos for how it’s handled cryptocurrency so far; it’s been far from perfect, but you can tell they are trying to be accommodating and employ common sense.

Take a look at how fishing works -- it's also got tons of weird nuance about who get what and how to tax it. We techies sometimes forget that other aspects of life are complicated.

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#99

Post by rsclient » Wed, Oct 09, 2019, 11:30 PM UTC

shiado wrote: post #82

prolixus wrote: post #50

Earlier quoted context omitted.

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 co…

This generates a lot of additional questions. What about a multisig situation? Can I have a buddy withhold a digital signature until I want to transact so that I did not own the crypto up until the transaction? Add in multiple jurisdictions of private key holders and things could get really interesting. Maybe it would be possible to pay no taxes at all! What about exchange coins where the person has no private keys a…

Lots of IRS regs are about the common case, not weird cases.

As an analogy: if I get paid by check on december 30th, and the check doesn't clear until january 2nd, is the income for the old year, or the new year? What if I hold onto the check, waiting for the new year? How about if I have the check, but I'm snowed in, and can't get to the bank? What if I can get to the bank on december 30th, but the bank is snowed in and closed?

(Answers: old year, old year, and then two don't knows)

Re: IRS issues additional guidance on tax treatment for cryptocurrency

#100

Post by freeAgent » Wed, Oct 09, 2019, 11:49 PM UTC

wglb wrote: post #88

freeAgent wrote: post #79

Earlier quoted context omitted.

I think the tax treatment of cryptocurrency is nonsensical if one views and attempts to use it as a currency rather than an investment. There is no exclusion of small transactions from capital gains reporting requirements like there is for foreign fiat currencies. That means that actual currency users must track and report cost basis and gains on every single transaction, no matter how small, in order to remain in co…

Keep in mind that if you swap houses that you bought as an investment, there is still the possibility of a tax liability. Barter is not excluded from taxation.

The first $250-500k of capital gains on houses is tax-free when you sell your house. I would argue that the IRS should treat cryptocurrency like other foreign currencies where the first $200 of capital gains is not taxed: https://www.irs.gov/publications/p525#en_US_2018_publink1000...

That would just put cryptocurrency on similar footing as any other currency.