On October 9, 2019, the US Internal Revenue Service (IRS) updated its 2014 cryptographic currency tax guide (Revenue Ruling 2019-24 ( https://www.irs.gov/pub/irs-drop/rr-19 -24.pdf )), this guide is used to provide guidance on tax principles in the field of cryptocurrency . At the same time, IRS also launched a Q&A page to further elaborate on some specific issues ( https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions ).
Since the IRS first defined cryptocurrency as a property tax in 2014, the IRS tax rules have barely changed significantly. The guidelines published in 2014 have been criticized (Notice 2014-21 ( https://www.irs.gov/pub/irs-drop/n-14-21.pdf )) and are considered to be many standards in the field of cryptocurrency. Inappropriate or ambiguous. In May 2018, at least five members of the US House of Representatives asked the IRS (US Internal Revenue Service) to propose clearer rules on cryptocurrencies. This IRS finally brought the first update to the guide for five years.
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This new guide confirms or draws on many of the assumptions that cryptocurrency companies and tax professionals have previously made for the ambiguities in the 2014 guidelines. This update mainly explains the following issues: 1. Taxation standards for cryptocurrency splitting or airdropping; 2. Defining the cost basis calculation method; 3. Taxation criteria for cryptocurrency transfer.
I. The content of this update of IRS mainly explains the following issues:
1. Encrypted currency hard fork
1.1. If a certain cryptocurrency held by the user passes through a hard fork, the new cryptocurrency received by the user due to the fork will be taxed as income.
At this time, the user's revenue for the newly received cryptocurrency will be used as the cost basis for this part of the cryptocurrency.
The user holds 2.5 BTCs in July 2017, and receives 2.5 BCHs due to BTC hard forks, the fair market value corresponding to the user receiving the 2.5 BCHs should be recognized as revenue. Assuming that the BCH transaction price for the day is $500 each, the revenue is confirmed to be $1,250 (ie $500*2.5), so the user's cost base for the BCH is also $1,250.
1.2. If the user does not receive a new cryptocurrency due to a hard fork, there is no need to calculate any taxable income for the hard fork event.
2. Encrypted currency soft fork
The cryptocurrency soft fork will not result in a new cryptocurrency, which means that no taxable income will be generated.
3. Encrypted currency airdrop
3.1. If the user receives the cryptocurrency from the airdrop, the user should confirm the revenue when receiving the cryptocurrency of the airdrop. The amount of revenue recognized should be determined using the fair market value of the cryptocurrency at the time.
3.2. If no cryptocurrency is received after the airdrop event occurs, there is no need to calculate any taxable income for the airdrop event.
4. Cost Basis (Cost Basis)
Before the release of this new guide, it has not been clear how taxpayers determine the cost base for their cryptocurrency assets. This time, the US Internal Revenue Service officially clarified this topic.
4.1. The encrypted assets traded by the taxpayer “specific identification” are used as accounting methods.
That is: taxpayers can choose how many quantities and types of cryptocurrencies to sell at a given time, as long as the taxpayer can clearly identify and prove the cost basis of these cryptocurrencies.
In order to clearly identify a cryptocurrency, the taxpayer must include the following information.
(1) The date and time of purchase of each cryptocurrency;
(2) the taxpayer's cost basis and the fair market value of each cryptocurrency purchased;
(3) the date and time at which each cryptocurrency is sold, traded or otherwise disposed of;
(4) Fair market value at the time of sale, transaction or disposal of each encrypted currency, and the value of money or property received in respect of each cryptocurrency.
4.2. If the taxpayer is unable to specifically identify his or her own cryptocurrency, the default is the first in first out (FIFO) accounting method.
5. Encrypted currency transfer: no taxation event
Although it has been stated in the previous document, this new guide reaffirms that taxpayers do not need to pay taxes if they only transfer cryptocurrencies from one platform or from one wallet to another.
Second, in addition to the tax rules updated this time, what other tax policies does the US have for cryptocurrencies?
1. cryptocurrency taxable event
1.1. Trading a cryptocurrency into a legal currency such as the US dollar is a taxable event;
1.2. Trading a cryptocurrency to another cryptocurrency is a taxable event (the user must calculate the fair market value of the corresponding US dollar at the time of the transaction)
1.3. The use of cryptocurrencies for goods and services is a taxable event (again, the user must calculate the fair market value of the corresponding dollar at the time of the transaction)
1.4. Earning cryptocurrency as income is a taxable event (from mining or other forms of earning cryptocurrency)
2. Under what circumstances is it not considered a taxable event?
2.1. Giving cryptocurrency as a gift as a non-taxable event
2.2. Transferring between cryptocurrency exchanges or wallets as non-taxable events (users transfer cryptocurrency between exchanges or wallets, not achieving capital gains and losses)
2.3. Buying cryptocurrencies in US dollars is a non-taxable event (users can only earn revenue when trading, using or selling cryptocurrencies)
3. Other noteworthy situations
3.1. Direct mining of cryptocurrency (mining) will result in two separate taxable events. The first is the dollar value (ie, the income earned) corresponding to the cryptocurrency mined by the user, and the second is the capital gains and losses generated by the cryptocurrency sold or traded by the user. Moreover, users use cryptocurrencies as a hobby or as a business entity, and the standards for tax payment are different.
3.2. If the cryptocurrency held by the user generates a capital loss rather than a benefit (as in most traders in 2018), then the user can claim the loss to avoid the corresponding tax.
3. Under the current law, how do taxpayers calculate the “revenue” of taxable?
1. Determine the cost basis for holding assets.
Essentially, the cost basis is how much money a user invests in buying a property. For cryptographic assets, the "cost basis" includes the "purchase price" and "all other costs associated with purchasing cryptocurrencies." Other costs typically include transaction fees, commissions, exchange commissions, and more. Specifically:
Cost basis = (purchase currency purchase price + other costs) / holdings
For example, the user invested $100 in November 2017 to purchase LTC, bought 1.1 Litecoin, and paid a transaction fee of 1.50%. Your fee base will be calculated as follows:
Then, the cost basis is: ($100.00 + 1.50%* 100)/1.1 = $92.27 per Litecoin
2. Subtract the cost basis from the fair market value
The second step in determining capital gains and losses is to subtract the cost basis only from the selling price of the cryptocurrency. The selling price is also commonly referred to as fair market value.
Capital gains/losses = fair market value – cost basis
For example, the user sold a Litecoin a month later because the price doubled to $200 per token. This will be considered a taxable event:
Then, the capital gain is: 200–92.27 = $107.73
$200 is the fair market value of the dollar at the time of the transaction. $ 92.27 is the cost basis for the user this time, and the corresponding $ 107.73 is capital gains, some of which should be used for taxation.
3. If a transaction scenario involving conversion of cryptocurrency to cryptocurrency is involved, a taxable event will also be triggered and the calculation of capital gains will be relatively complicated.
The user purchased a BTC worth $100 (including transaction and brokerage fees), which is $100 as the cost basis. This $100 purchased about 0.01 BTC. Two months later, the user converted 0.01 BTC bitcoins into 0.16 LTCs.
At this time, the capital gains from the cryptocurrency to the cryptocurrency transaction are entirely dependent on the fair market value of the BTC at the time of the transaction.
Assuming that the BTC is worth $160 when the BTC deals to the LTC, the fair market value of the 0.01 bitcoin is $160.
Then, capital gains: 160–100 = $60.00
For the transaction of the coin, the corresponding $60 is the capital gain, and part of it should be used for taxation.
Fourth, the United States on the development of cryptocurrency tax
The tax issue regarding cryptocurrency has been a globally controversial issue. Unlike Germany, Singapore, Portugal, Malta, Malaysia, and other countries that explicitly state that cryptocurrencies are not taxed, the US Internal Revenue Service (IRS) has issued a tax guide for the first time since 2014, and defines cryptocurrency as property and begins to levy income tax.
In the past few years, in order to vigorously promote the tax development of the US cryptocurrency, the IRS has filed a lawsuit with Coinbase, the largest exchange in the United States, to provide users with personal information in order to collect taxes (the original text of the judgment " https://www.journalofaccountancy .com/issues/2018/mar/irs-summons-of-coinbase-records.html ”). The case ended with the IRS victory. Coinbase officially notified the user on February 23, 2018 that it was forced to provide 13,000 customer information at the request of IRS, including “taxpayer ID, name, date of birth, address and some between 2013 and 2015. These transactions are higher than the customer's historical transaction history."
From July to August 2018, the US Internal Revenue Service (IRS) issued letters of 6173, 6174, or 6174-A to more than 10,000 US cryptocurrency holders, requesting the recipient to sign and certify that they comply with US tax laws. And advise them to pay taxes.
According to relevant US laws, if a citizen refuses to bear the tax liability, he or she will face tax fraud. The US Internal Revenue Service can impose various penalties on it, including criminal prosecution, imprisonment for five years and a fine of up to $250,000.
This time, the IRS has once again updated the taxation guidance for cryptocurrencies. In addition to clarifying the tax rules mentioned above, it is undoubtedly also conveying the determination and direction that the United States will vigorously promote the inclusion of cryptocurrencies in comprehensive supervision.
Author: digital currency areas, a senior legal advisor Jia Wang Yi
This article is authorised by the author, first published in Babbitt information, please indicate the source.