Recently, Charles P. Rettig, director of the US Internal Revenue Service (IRS), said that the agency plans to issue more cryptocurrency tax guides, the first time in more than five years.
With the rapid development of encryption and blockchain ecosystems in recent years, this guide was introduced at the urging of tax professionals and consumers. According to Rettig, the IRS is working to provide a clear explanation of “acceptable cost-based calculation methods, acceptable cost-based allocation methods, and forked tax treatment”.
This article discusses the most important things to note in the new guide and their importance.
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1. Acceptable calculation method for cost basis
The 2014 guidance stated that the fair market value of cryptocurrencies is determined by “converting into US dollars at a reasonable, consistently applicable exchange rate”. However, this leaves quite a problem, because the price of cryptocurrencies can vary greatly, sometimes without the associated dollar price.
There are several different ways to calculate the cost basis with other forms of property, such as trading stocks. The original guidelines did not explicitly state whether accounting methods such as first in first out (FIFO), average cost basis (ACB), or last in first out (LIFO) were available for cryptocurrency.
This gray zone has caused cryptocurrency investors to question whether the cost-based calculation method they choose will be challenged by the IRS. Software developed specifically for encryption taxes typically offers users a variety of cost-based computing options, and investors are now using a variety of methods.
It is important to clarify the cost basis calculations because different methods result in different profit and loss sizes. For example, in the context of rising bitcoin prices in 2019, the LIFO calculation will result in a decrease in net income. In this case, the token you get at a higher cost will be sold first. This, in turn, will reduce the amount of money owed on your tax return. However, we still don't know if LIFO will be allowed to use. The IRS's clarification on acceptable methods will be very important in future guidance.
2. Handling forks, airdrops and staking rewards
In addition to the questions surrounding the appropriate cost-based calculation method, there is a list of other tax matters that need to be clarified, including tokens, airdrops, and staking rewards received from the fork.
Each type of event causes the user to receive a certain amount of cryptocurrency because he or she already holds another cryptocurrency. For example, anyone who holds Bitcoin on August 1, 2017 can get the equivalent of the amount of Bitcoin cash that was born that day. They can also claim other currencies that are subsequently separated from the main chain. This is an example of receiving tokens from hard forks. However, the 2014 guidance did not specify how to treat these bitcoin taxes.
This problem becomes more complicated when the holder has no right to decide whether to accept tokens from forks or airdrop events. For example, if a taxpayer keeps their cryptocurrency on a escrow exchange (such as Coinbase), then any action taken by the exchange on an airdrop or forked token should not affect the taxpayer unless the action is directed at the taxpayer. Underneath.
With the further guidance of forks, airdrops, and staking, the things to watch out for are whether these events should be considered ordinary income when they are received. It is also necessary to clarify how to determine the fair market value of these cryptocurrencies.
3. Foreign reporting requirements
Another hot debate between tax professionals in the field of cryptocurrencies is whether holders of cryptocurrencies are in the foreign exchange market.
For example, Binance accepts foreign reporting requirements through reports on foreign banks and financial accounts (FBARs) and the Foreign Account Tax Compliance Act (FATCA).
These reports require holders of foreign financial accounts that exist in the United States. For example, if you have an account with more than $10,000 in financial assets in Switzerland, you will need to submit an FBAR file. If the account has more than $50,000 at any time, the FATCA requirements also apply and need to be reported.
It is unclear whether the cryptocurrency held by foreign exchanges falls into this category. However, for individuals who meet FBAR/FATCA requirements, a conservative approach is to document these documents as a penalty for non-reporting. Many cryptocurrency tax software can automatically build and export these forms.
It is unclear whether the IRS will clarify foreign reporting requirements in the new guidelines, as Rettig does not include this as one of the areas of clarification. In any case, this is an important thing to note when the new guide is released.
The US Internal Revenue Service has not commented on cryptocurrency for five years. Due to the incredible vitality and continuous development of the industry, it is difficult for policy to keep pace. This new guideline will be available within the next 30 days and is expected to provide clear information that makes it easier for US ordinary investors to comply with cryptocurrency tax regulations.
Author: David Kemmerer
Compile: Sharing Finance Neo