The US tax service, the IRS, has finally issued crypto guidance and regulations for the treatment of cryptocurrencies. This has generally been described by the crypto community as a mixed bag citing that some parts of the governance are useful while others continue to bear more questions by the day.
The agency’s new guidance, which was published on Wednesday, constitutes revenue ruling 2019-24 and 43 frequently asked questions, FAQs. Part of the IRS details reads as follows: “the new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the treatment of taxes of cryptocurrencies hard fork. The set of FAQs also address virtual currency transactions for those who hold virtual money as a capital asset. General principles of tax law to determine that virtual currency is property for federal tax purposes is also stipulated.”
Whereas the IRS has moved to clarify some issues that are currently facing its governance structure and methodology, there still exist many more questions concerning the new guidelines. For instance, a heavily discussed issue concerning the new guidance and treatment of cryptocurrencies includes the address of how hard forks are treated.
The agency continues to say, “if a hard fork is followed by an AirDrop and you receive new crypto-currency, you will have taxable income in the taxable year you receive that cryptocurrency. When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange or otherwise dispose of the cryptocurrency.”
However, there also exists the question of what constitutes receipt of that new coin. Peter van Valkenburg, who is the current director of research at coin center, made comments about the new governance from the IRS stating that “that means that anyone who works a blockchain can, without warning or notice, create new tax obligations for every holder of coins on the old chain. The same goes for airdrops. Anytime someone airdrops to an address over which you have dominion and control, they will create a tax reporting obligation on your part. This has very bad results.”
Simply put, Peter notes that just having private keys to any cryptocurrency would trigger an income event if a third-party forked its blockchain. Following the publication of the new IRS guidance, a number of enthusiasts have flooded social media bringing back feedback and even more questions concerning the hard forks and airdrops regulations.
Van Valkenburg further points out the problem of how the IRS has moved to describe the two events. He says in part, “it suggests that some hard forks come with airdrops and some don’t. However, airdrops and hard forks are distinct and unrelated terms that the IRS seems to be conflicting.”
The tax agency has been ramping up efforts to remind everyone to pay their taxes. This has been done, including sending letters to more than 10000 taxpayers in July, who may have reported transactions regarding virtual currency incorrectly or did not at all.
The IRS insists “taxpayers who did not report transactions involving virtual currency or who reported them incorrectly may when appropriate, be liable for tax penalties and interest. In some cases, they might even be subject to criminal prosecution.”