New Crypto Tax Guidance for 2023
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Crypto gains and losses, including crypto-to-crypto trades, must be reported to the IRS. New guidance clarifies how to handle hard forks and airdrops and the use of specific identification for cost basis calculations.
Transfers between your own wallets or accounts are not taxable events, regardless of information returns received.
Finally: New crypto tax guidance from the IRS
In a new FAQ, the IRS has supplied new answers regarding cryptocurrency tax treatment and reminders of their current policy, such as that all gains or losses from cryptocurrency sales need to be reported, including crypto-to-crypto trades.
The IRS has also included answers for calculating gain/loss and cost basis — all processes that software for cryptocurrency tax handles automatically.
Noteworthy is new guidance regarding:
How to handle hard forks and airdrops
Clarification that specific identification accounting can be used for cost basis calculations
Clarification that transfers are not taxable events
Some matters are notably omitted, such as wash-sale trading rules and whether like-kind exchange would have been allowed in past years, areas where common sense and situation-by-situation analysis still apply.
Hard forks and airdrops are ordinary income at time of receipt
Questions 22 through 24 in the FAQ address hard forks. The IRS now states that cryptocurrencies received in hard forks result in taxable income in the year that you received the forked coin.
That income will be “ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.”
The cost basis of the forked coin will be the income amount that you reported for receiving it. So, if you received $1,000 worth of BCH when it forked from BTC, you would report $1,000 in ordinary income and then have a cost basis of $1,000 for that BCH.
Airdrops are treated the same way, assuming the airdrop is actually received.
Specific identification of “tax lots,” i.e. you don’t have to use FIFO
Answers 36 – 38 address a common situation where a sale of cryptocurrency can have multiple cost basis amounts and times.
The IRS states, “You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units...” by, for example, using TokenTax for your crypto tax lot tracking.
TokenTax is the home of the minimization algorithm that helps you identify which holdings will result in the lowest tax liability in real-time.
Units of cryptocurrency are able to be specifically identified if you have the date and time of acquisition, the cost basis/fair market value at this time, the date of sale/exchange, the date and time of sale, and the fair market of the crypto when sold.
TokenTax automatically imports this information needed for specific identification when you import your transaction data.
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Transfers are not taxable events
Crypto transfers between wallets you control are not taxable. In question/answer 35, the IRS clarifies, “If you transfer virtual currency from a wallet, address, or account belonging to you to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event, even if you receive an information return from an exchange or platform as a result of the transfer.”
This means that you don’t need to worry about reconciling every deposit/withdrawal between wallets and exchanges and that the number reported on 1099-Ks received from exchanges isn’t necessarily tied to your trading volume.
Unfortunately, many crypto tax software providers — even the tax forms provided by prominent exchange Coinbase — automatically count withdrawals as taxable events. If you filed your taxes in prior years with Coinbase tax reports, you have likely overpaid your taxes and can claim a refund if you amend your filing within 3 years. TokenTax’s team of accountants can help you get back these overpayments.
Taxpayers must maintain records of their transactions
The last answer of the FAQ clarifies that “The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the positions taken on tax returns.” Remember always to keep backups of your trading information! TokenTax keeps your transaction history, so you can keep an up-to-date running ledger on our platform.
Frequently asked questions about new crypto tax guidance
Here are answers to frequently asked questions about new IRS crypto tax guidance.
How should I handle hard forks and airdrops for tax purposes?
Hard forks and airdrops are treated as ordinary income at the time of receipt. For hard forks, the income is equal to the fair market value of the new cryptocurrency when received. The cost basis of the forked coin will be the income amount reported upon receipt.
Do I have to use the FIFO (First-In-First-Out) method for calculating my cryptocurrency gains/losses?
No, you are not required to use FIFO. You can choose to specifically identify which virtual currency units are involved in a transaction if you have the necessary information, such as acquisition date, cost basis, sale date, and fair market value at the time of sale.
Are transfers of virtual currency between my own wallets or accounts taxable events?
No, virtual currency transfers between wallets or accounts that belong to you are not taxable events. Even if you receive an information return from an exchange or platform due to the transfer, it remains non-taxable.
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