The Internal Revenue Service (IRS) recently released instructions for computing taxes involving crypto assets. The digital market has been waiting for this report since May 2019 after the Revenue’s chief Chuck Rettig hinted at an update to the existing regulations. In April 2019, some members of Congress wrote to Rettig seeking clarification regarding crypto reporting requirements and related tax consequences.
The guidance consists of a revenue ruling section and FAQs. According to Rettig, the IRS is dedicated to increasing citizens’ understanding of their tax requirements in this developing sector. The new directive, he added, would enable taxpayers and industry professionals to understand how prevailing tax principles fit into the ever-changing scene.
What’s more, the authority would shed some light on the relevant reporting requirements and ensure fair implementation of tax regulations. Although the guidance addresses Federal income taxes, states might soon observe these rules. Some of the highlighted issues include tax liabilities from crypto forks, computing taxable gains during cryptocurrency sales and how to estimate cryptocurrency earnings.
The document states that new digital currencies developed from a current Blockchain fork should be considered as normal income equivalent to the new coin’s market price when received. This is only possible if you are in control of the coins. While a hard fork arises when coins in a shared ledger shift, a soft fork is from a protocol switch that does not divert the ledger, hence, does not create another cryptocurrency.
As such, holding digital coins before hard forks or immediately after is free of tax penalties. However, a new cryptocurrency’s airdrop after a hard fork incurs tax on the airdrop’s value. An airdrop spreads crypto units to multiple users’ ledger addresses.
Determining Cost Basis
It also explains how to find the market price of currencies earned from mining and selling goods and services. When it comes to the cost basis, add the cash spent on buying the coins to the other acquisition costs in U.S. dollars. In addition, the document explains how to work out the cost basis for every crypto unit disposed of through a taxable deal.
Take the example of an investor who has bought bitcoins through different transactions over the years. During the sale, it will be unclear which buying price to use when computing taxable gains. A coin’s price determines its value when bought at an exchange. Income basis, therefore, comprises of fees and similar purchase costs.
When buying the cryptocurrency at a peer to peer (P2P) exchange, you can establish its market value using a price index. According to the IRS, this could be an explorer that checks global crypto indices and computes coin values at a particular date and time. Users distinguish the coins they are selling by recording distinct labels such as addresses or private and public keys. Alternatively, they can use the transaction registers of all units.
This report borrows from a similar IRS directive in 2014. Dubbed Notice 2014-21, the document contains 16 FAQs explaining the relevance of general tax concepts in crypto transactions. It describes a crypto coin as a digital symbol of value functioning as an accounting unit, mode of exchange and store of value.
Although digital coins act as real currency in certain environments, they lack legal tender status. Virtual currency is considered a capital asset only if it is convertible to cash. For example, users can buy bitcoins or convert them into currencies like the Euro and the U.S. dollar. Needless to say, capital gains principles cover both profits and losses.
Gifts and Contributions
Suppose virtual currency is exchanged as a gift. The giver does not incur taxes. The gifted individual, on the other hand, will not earn from it unless they sell or exchange it. It is prudent to note that business gifts do not apply. When it comes to donations, the charges are equivalent to the currency’s value if the period you held it exceeded one year.
The IRS notes that some users have not reported their earnings nor paid the resulting taxes. Similarly, others have given incorrect information about their transactions. Therefore, the commission is using methods such as audits, tax literacy and criminal investigations to tackle non-compliance.
In July 209, for example, the authority declared that it had sent letters to over 10,000 citizens who submitted false crypto transactions or failed to report their activities altogether. Such offenses could attract penalties, interests and even criminal prosecution. Investors should, therefore, document transactions such as sales, receipts, and exchanges to determine their tax returns.
Featured image via BigStock.
Source: Read Full Article