Finally: New crypto tax guidance from the IRS
In a new FAQ, the IRS has supplied new answers regarding cryptocurrency tax treatment as well as reminders of their current policy, such as that all gain or loss from sales of cryptocurrency need to be reported, including crypto to crypto trades. They’ve also included answers for how to calculate gain/loss and cost basis — all processes that TokenTax platform can handle automatically.
Noteworthy is new guidance regarding:
How to handle hard forks and airdrops
Clarification that specific identification can be used for cost basis calculations
Clarification that transfers are not taxable events
Most guidance was widely expected by the industry while others may be in for a bit more of a surprise. Regardless, the TokenTax team and all of the professionals working in crypto tax day in and day out are extremely glad to get concrete guidance from the IRS. Some things 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 likely rule the day.
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 home of the patent pending 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.
Transfers are NOT taxable events
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 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 counted 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 to always keep backups of your trading information! TokenTax keeps your transaction history, so you can keep an up to date running ledger on our platform.
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