IRS Gives Out Clues at Upcoming Crypto Tax Guidelines

With the tax season coming to an end, it’s a big pain for most people involved in crypto. Although there are some guidelines in most countries as to how to file returns on crypto, most of the time it’s vague and puts people at the risk of liability as a result of wrongful filing. It is a trend we have been observing since the dawn of technology. “Regulation always fall behind technology”, and this has created some blind spots. These blindspots are airdrops, forks etc, which have no mentions in the 2014 guidelines put forward by the IRS (Internal Revenue Service). And now the IRS will be putting out a new set of guidelines. This means that come next April, it might be a little bit easier to file returns on crypto assets. 

Update long due

The coming guidance from the IRS will address longstanding questions about the tax treatment of cryptocurrency which has caused a lot of confusion and headache. These will include several very specific issues like, whether investors owe taxes on free crypto they get from a fork. It might sound a bit scary as most in the industry think of it as free money. Also, if they are to be taxed how should it be taxed. Should the user be taxed at the rate at the time of fork? And if the user never sells it, will it become a taxable event? The industry is also hoping for clarity on a number of other matters, including the tax implications of airdrops, staking and crypto stored at overseas exchanges.

Forks and airdrops

An airdrop for a cryptocurrency is a procedure of distributing new tokens/coins by awarding them in a certain proportion to existing holders of a particular blockchain currency such as Bitcoin or Ethereum etc. Sometimes, there are different reasons and motivations for these air drops, such as forks, marketing, decentralization & distribution, etc. Another peculiar feature of crypto is forking, especially hard-forks make it harder for filing purposes. A hard fork is when a single cryptocurrency splits into two. It occurs when a cryptocurrency’s existing code is changed, resulting in both an old and new version. Usually, this means that the holders of the old coin get free coins in the new cryptocurrency. These two issues are not yet covered under the IRS guidelines of 2014. 

Compliance

Upwork US released its highest in-demand skills in Q1 2019 and it includes US taxation in its top, and it is for a reason. Taxation code has changed dramatically not only in crypto but also in all other sectors as well. The stringent measure we expect makes sense when it comes to crypto but it raises serious compliance questions, in terms of skill, tools and cost. It is an active argument put forward by the NRA(National Rifle Association), we pass a small regulation now and another tomorrow and within a few years it will end up in a full blown bureaucratic blot. Which begs the question, with all the new regulations coming up will crypto still look attractive? 

Letter campaign

On Friday, the IRS announced that it has begun sending letters to taxpayers who own cryptocurrency. The IRS further said that it will have sent such letters to “more than 10,000 taxpayers” by the end of this month. ”It’s hard to predict when the IRS will publish the new guidance, but IRS has extended the due date for individual returns to October 15, and for pass-through businesses it is September 15. These aggressive measures could give a hint of what is to be expected from the new guidelines.

Previous guidelines

The 2014 guidelines say that in order to calculate the price of crypto, take the price at some point during the day and use that to calculate fair market value. That is, if the market opened at a price of $50.69 for an Ethereum and fell as low as $32.77 and closed at $36.07. Any of these prices could work, as long as all calculations for all taxes were consistent. But this could lead to a lot of confusion for somebody involved in a multiple trades within a day and that is further complicated if the person happens to trade in different exchanges. The American Institute of Certified Public Accountants (AICPA) has suggested that taxpayers should be allowed to use the average rate of the day and the average price of different exchanges to calculate the value of their crypto, as well as aggregating indexes like CoinDesk’s Bitcoin Price Index.

Blockchain by its nature means that every transaction is recorded, this is in contrast with most means of payment we use today. It is something any tax agency would love to have but this has not been the case, because even though every transaction is recorded, we have no idea how to trace it to its owner. If crypto turns out to be a good source of revenue one day, the IRS might fall in love with crypto, but this will mean greater scrutiny and more regulation. As crypto becomes more mainstream, the tentacles of tax agencies will latch deeper into this space. 
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