The U.S. Internal Revenue Service has just released new tax guidance for crypto traders and investors.
The long-awaited document compiles a range of questions and concerns, covering the information in a Q&A format.
It marks the first formal tax guidance on cryptocurrency from the IRS since 2014. As noted previously, cryptocurrency (aka virtual currency) is treated as property for Federal income tax purposes.
The new guidance, “Frequently Asked Questions on Virtual Currency Transactions”, spells out rules for airdrops, tax consequences for coin exchanges between wallets and how to calculate fair market value (FMV).
The IRS also notes how taxpayers should calculate a gain or a loss when exchanging “property for virtual currency”.
“Your gain or loss is the difference between the fair market value of the virtual currency when received (in general, when the transaction is recorded on the distributed ledger) and your adjusted basis in the property exchanged.”
However, there is no mention of nominal crypto expenditures, i.e. using Bitcoin to buy a cup of coffee. The IRS makes no explicit statements about small cryptocurrency transactions being covered by “de minimis” exemptions.
Jake Chervinksy, general counsel at Compound Finance, calls the document “a mixed bag.”
“Some parts are helpful (calculating FMV); some are bad but expected (payments = capital gains/losses); some are nonsense (forks/airdrops).”
Washington DC-based Coin Center calls the IRS guidance “messy”.
“Any hard fork with new coins (e.g. Bitcoin Cash or Ether Classic) will create an income event for taxpayers…
Hard fork and airdrop terminology is used incorrectly…
What now? Coin Center will need to take some time to figure out next steps but it’s unlikely we can fix these bad outcomes merely by seeking additional clarity from the IRS.”