IRS Updates Guidance on Crypto Airdrops/Hard Fork Taxation

The US Internal Revenue Service (IRS) today issued additional guidance toward cryptocurrency taxation, which provides more clarification in regard to the way these virtual assets are taxed in America.

Since 2014, the so-called ‘Notice 2014-21’ has been the only guidance the tax department has published before mailing cryptocurrency holders warning of penalties if they fail to pay tax on crypto transactions.

The IRS has published over 40 Q&As on cryptocurrency tax compliance in a fresh signal of increasing its focus after first being slow to stay abreast of the growing industry.

At the very core, the IRS still deems crypto assets to be property rather than currency for income tax purposes, the same as its regulatory guidance came out five years ago. That means the authority will continue to tax crypto profits and losses like those for stocks, at capital gains rates.

The latest update, however, mainly handles cryptocurrency airdrops/ hard forks and its tax implications. Specifically, the IRS explains that if you received free Cryptocurrencies Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw Read this Term through “a hard Fork Fork A fork can occur when a blockchain diverges into two potential paths forward, there is a change in protocol, or a scenario occurs in which two or more blocks have the same block height.Because blockchain networks are decentralized, the participants on the network must come to an agreement when it comes to things like software upgrades to a network. This is called consensus.When consensus cannot be achieved on a software upgrade, a fork occurs, effectively representing a divergence in software th A fork can occur when a blockchain diverges into two potential paths forward, there is a change in protocol, or a scenario occurs in which two or more blocks have the same block height.Because blockchain networks are decentralized, the participants on the network must come to an agreement when it comes to things like software upgrades to a network. This is called consensus.When consensus cannot be achieved on a software upgrade, a fork occurs, effectively representing a divergence in software th Read this Term followed by an airdrop,” they would generally be taxable as ordinary income valued at the fair market value on the date of receipt.

“When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency,” it further states.

Airdrops and tax implications

At a minimum, the IRS has made it clear that for federal income tax purposes, it only recognizes the airdropped/forked coins when the investor is able to dispose of their holdings. Once the taxpayer acquires the ability to transfer, sell, or exchange the cryptocurrency, then he is treated as receiving the cryptocurrency at that time.

The IRS has also addressed how to track the fair market value, capital gains, and losses in the context of virtual currencies. When a transaction is facilitated by a cryptocurrency exchange, the value of the taxed deal is the amount that was recorded by the platform in US dollars. Further, the taxpayer’s buy/sell price will determine whether a gain or loss has occurred as well as its duration.

The IRS said it plans to make public criminal tax-evasion cases involving cryptocurrency, which opens a new front in the agency’s burgeoning scrutiny of the industry.

In 2017, the IRS won a landmark lawsuit that required Coinbase to hand over data on crypto traders who transacted in cryptocurrency from 2013 to 2015. Most recently, the agency sent letters to taxpayers who might have failed to report income and pay the resulting tax from cryptocurrency transactions.