CryptoCoinReport.Net The IRS Just Issued Its First Cryptocurrency Tax Guidance in 5 Years
Industry members have been eagerly awaiting the update since May 2019,
when IRS Commissioner Charles Rettig said the agency was working on
providing fresh guidance. The agency’s 2014 guidance left many questions
unanswered, and the crypto market has grown more complex in the years
As expected, the guidance notice released Wednesday addresses: the
tax liabilities created by cryptocurrency forks; the acceptable methods
for valuing cryptocurrency received as income; and how to calculate
taxable gains when selling cryptocurrencies.
Drew Hinkes, a lawyer with Carlton Fields and the general counsel to
Athena Blockchain, told CoinDesk that “from the tax collector’s
standpoint, this is the right answer,” though Certified Public
Accountant Kirk Phillips said he was surprised that the guidance
basically only addressed forks.
Resolving a long-standing
question, the guidance says new cryptocurrencies created from a fork of
an existing blockchain should be treated as “an ordinary income equal
to the fair market value of the new cryptocurrency when it is received.”
In other words, tax liabilities will apply when the new
cryptocurrencies are recorded on a blockchain – if a taxpayer actually
has control over the coins and can spend them.
The document reads:
“If your cryptocurrency went through a hard fork, but you
did not receive any new cryptocurrency, whether through an airdrop (a
distribution of cryptocurrency to multiple taxpayers’ distributed ledger
addresses) or some other kind of transfer, you don’t have
James Mastracchio, a partner at Eversheds Sutherland, told CoinDesk
that this applies when there is a distinctly different cryptocurrency as
a result of the hard fork.
The IRS language might create more confusion, said Jerry Brito, executive director at Coin Center.
“While the new guidance offers some much-needed clarity on certain
questions related to calculating basis, gains, and losses, it seems
confused about the nature of hard forks and airdrops,” Brito told
“One unfortunate consequence of this guidance is that
third parties can now create tax reporting obligations for you by simply
forking a network whose coins you own, or foisting on you an unwanted
Individuals would be assessed income when they receive the asset, Hinkes said.
“Receipt is defined by ‘dominion and control’ … so it’s ability to
transfer, sell, exchange or dispose of the asset according to this
guidance,” he said. “The fear is that someone maliciously airdrops and
tags you with a giant liability. But [this] fear is a bit oversold
because you would only be liable for new income based on the fair market
value of the asset when received, and most forks don’t start out with a
Phillips said it was possible that an individual with an ethereum
wallet, for example, could receive an ERC-20 token from an airdrop
without realizing it. Depending on how the token’s value fluctuates,
this may result in them having to pay income tax on an asset that was
worth more when they received it than when they sell the asset.
“This can happen when coins hit a high water mark of price discovery
right after the airdrop event and the heavy selling could sink the price
to a level from which is never recovers,” he said.
The issue has grown more salient in recent years, as fights over
protocol changes caused rifts in various crypto communities, leading to
splinter currencies like ethereum classic and bitcoin cash.
Holders of the original bitcoin and ethereum could automatically
claim a like amount of the new coins, raising the question of whether
and under what conditions they would owe taxes on the windfall.
Now crypto holders and their accountants have a roadmap.
The new IRS document also offers long-awaited clarification on how
taxpayers can determine the cost basis, or fair market value of coins
received as income, such as from mining or the sale of goods and
Cost basis should be calculated by summing up all the money spent to
acquire the crypto, “including fees, commissions and other acquisition
costs in U.S. dollars.”
A third key issue addressed by the new IRS guidance is how to
determine the cost basis of each unit of cryptocurrency that is disposed
of in a taxable transaction (such as a sale).
This is an issue because someone might buy bitcoin in multiple
transactions over a span of years; when they sold some of it, it was
unclear which purchase price to use for calculating taxable gains.
The value of the crypto purchased on an exchange is determined by the
amount the exchange sold it for in U.S. dollars. The income basis, in
this case, will include commissions, fees and other costs of the
If the crypto is bought on a peer-to-peer exchange or a DEX, it is
possible to use a crypto price index to determine the fair market value.
In the words of IRS, this can be “a cryptocurrency or blockchain
explorer that analyzes worldwide indices of a cryptocurrency and
calculates the value of the cryptocurrency at an exact date and time.”
When selling crypto, taxpayers can identify the coins they are
disposing of, “either by documenting the specific unit’s unique digital
identifier such as a private key, public key, and address, or by records
showing the transaction information for all units” in a single account
or address, the IRS wrote.
This information, the document states, must show:
“(1) the date and time each unit was acquired, (2) your
basis and the fair market value of each unit at the time it was
acquired, (3) the date and time each unit was sold, exchanged, or
otherwise disposed of, and (4) the fair market value of each unit when
sold, exchanged, or disposed of, and the amount of money or the value of
property received for each unit.”
The new guidance allows for “first-in, first-out” accounting or
specifically identifying when the cryptocurrencies being sold were
acquired, Mastracchio said.
“Let’s say I bought my first unit at $5,000 and my second unit at
$2,000 and then I sold one of my units. I can identify the unit or I can
use ‘first-in, first-out,’” he said. “From a tax planning perspective,
you may want to be specific about which unit you sold or you may want to
use first-in, first-out because sometimes you want a capital gain and
sometimes you might want a loss.”
In a disappointment to crypto users who like to spend their coins on
everyday purchases like cups of coffee, the IRS specifically said it
would not create an exemption for transactions below a certain
Paying somebody for service will result in a capital gain or loss,
which should be calculated as “the difference between the fair market
value of the services you received and your adjusted basis in the
virtual currency exchanged.”
Purchases of goods and services were deemed taxable when the IRS issued its original guidance
in 2014, which said that digital currencies were to be treated as
property rather than currency for tax purposes. This discouraged casual
spending and made tax season burdensome for users who wanted to
diligently report their obligations.
Nikhilesh De contributed reporting.
IRS building image via Shutterstock