What issues are explained by the IRS's updated cryptographic tax guide?

The US Internal Revenue Service (IRS) has published the first cryptographic tax guidelines for five years to calculate the tax payable on cryptocurrencies.

Since the US Internal Revenue Service Director Charles Rettig revealed in May 2019 that the agency is working to provide new guidance, the industry has been waiting for an IRS update. The last guidelines issued by the agency in 2014 have left many problems, and since then, the encryption market has become more complex.

As expected, the guidelines issued on Wednesday involved tax liabilities arising from cryptocurrency forks, acceptable valuation methods for tokens earned as income, and how to calculate taxable income when selling cryptocurrencies.

Drew Hinkes, a lawyer at Carlton Fields and general counsel at Athena Blockchain, told CoinDesk, “From the tax collector's point of view, this is the right answer.” But at the same time, Certified Public Accountant Kirk Phillips said he was surprised because “this guide Basically only for fork related issues."

Bifurcation related problem

 

The guide issued this time solves a long-standing problem that the new cryptocurrency created by the fork of the existing blockchain should be treated as an "ordinary income", equivalent to receiving a new encryption. Fair market value in currency.

In other words, when new cryptocurrencies are recorded on the blockchain (if the taxpayer actually controls the currency and can use them), tax liability will apply.

  • The IRS document mentions: "If your cryptocurrency has experienced a hard fork, but you have not received any new cryptocurrency, either by airdrop (the cryptocurrency is distributed to multiple taxpayers' distributed ledger addresses) or other With the transfer of methods, you have no taxable income."

Eversheds Sutherland partner James Mastracchio told CoinDesk that this applies when the hard fork produces another distinct cryptocurrency.

Jerry Brito, executive director of Coin Center, points out that the wording of the IRS may cause more confusion. He said: "Although the new guidance provides some much-needed clarity on certain issues of benchmarking, revenue and loss, it seems to confuse the nature of hard forks and airdrops. An unfortunate consequence of this guide is Third parties can now bring you a tax return obligation by forcing the network of tokens you hold, or forcing you to provide unneeded airdrops. "

Drew Hinkes said individuals will be assessed for income after receiving assets. He explained: “Receiving is defined by 'dominance and control'… It is defined in the guiding principles as the ability to transfer, sell, trade or dispose of assets. People are worried that someone is maliciously thrown and gives you huge debts. But this kind of worry is a bit too much, because you will only be responsible for new income based on the fair market value of the assets received, and most of the forks are not initially valued at the beginning."

Kirk Phillips said that, for example, a person carrying an Ethereum wallet might receive an airdrop ERC-20 token without being aware of it. Depending on how the value of the token fluctuates, this may result in them having to pay income tax on an asset whose value is much higher than the value at the time of acceptance. He further explained: "This may happen after the airdrop event, when the contemporary currency hits the high point of price discovery, a lot of selling may cause the price to fall to a level that can never be recovered."

In recent years, the issue of taxation on forked coins is becoming more and more prominent, as the battles around the revision of the agreement have led to cracks in various encryption communities, such as the emergence of Ether Classics (ETC) and Bitcoin Cash (BCH).

The original Bitcoin and Ethereum holders can automatically request the same amount of new forks, which raises the question of whether they need to pay taxes on the windfall and under what circumstances they need to pay taxes.

Now, cryptocurrency holders and their accountants have a road map.

Cost basis related issues

 

The IRS's new document also clarifies another long-awaited question of how taxpayers determine the cost base and the fair market value of tokens earned as income, such as mining or selling goods and services.

The cost basis should be calculated by summarizing all the costs of purchasing cryptocurrencies, including "costs, commissions, and other purchase costs in US dollars."

The third key issue addressed by the new IRS guide is how to determine the cost basis for each cryptocurrency disposed of in a taxable transaction (such as a sale). This is obviously a problem, because someone may buy Bitcoin in multiple transactions within a few years. When they sell some assets, it is not clear which purchase price is used to calculate taxable income.

  • The value of the cryptocurrency purchased on the exchange is determined by the amount of the transaction that is sold in dollars. In this case, the income will include commissions, fees and other fees.
  • If a cryptocurrency is purchased on a P2P exchange or a decentralized exchange (DEX), the crypto-price index can be used to determine the fair market value. In the case of IRS, this can be a cryptocurrency or blockchain browser that analyzes the global index of cryptocurrency and calculates the value of the cryptocurrency at the exact date and time.

The IRS also mentions that when a taxpayer sells cryptocurrency, it can "record a unique unit of a unique digital identifier, such as a private key, a public key, and an address, in an account or address, or by recording a transaction for all units." Information" to identify the token being processed.

The document states that such information must show:

(1) the date and time of purchase of each unit;

(2) your cost basis and the fair market value at the time of buying each unit;

(3) the date and time of sale, transaction or other disposal of each unit;

(4) The fair market value at the time of sale, transaction or disposal of each unit, and the amount of money or property received by each unit.

James Mastracchio (partner of Eversheds Sutherland) said the new guidelines allow for “first in, first out” accounting methods and can also clearly determine when the cryptocurrency sold is being purchased.

He further explained: "Assume that I bought the first unit for $5,000, then bought the second unit for $2,000, and then sold one of the units. I can specify which unit was sold, also You can use 'first in, first out' because sometimes you want capital gains and sometimes you want to lose money."

other problems

 

The US Internal Revenue Service (IRS) has made it clear that no exemptions will be placed on transactions below a certain threshold. This may disappoint those who like to use tokens for everyday consumption.

Paying a service fee to someone will result in capital gains or losses, and capital gains or losses should be calculated as the difference between the fair market value of the service you receive and the adjusted base price of your virtual currency transaction.

When the US Internal Revenue Service issued its original guidelines in 2014, the purchase of goods and services was considered taxable. According to the guide, for tax purposes, digital currency should be treated as property, not currency. This inhibits casual spending and puts a heavy burden on the tax season for those who want to seriously report their obligations.

This article comes from CoinDesk , the original author: Anna Baydakova

Odaily Planet Daily Translator | Azuma

【Related Reading】

2019 Global cryptocurrency regulation "tax" trend: some pay taxes 300%, some unconditional tax exemption

US Internal Revenue Service upgrades, sending credits to cryptocurrency users

Fear of being dominated by the US Internal Revenue Service: Users with more than 10,000 cryptocurrencies will receive a tax "warning"