This week, on October 9, for the first time since 2014 the IRS issued a new guidance about cryptocurrency taxes. With already a lot of uncertainty with the IRS policy around crypto, we decided to put together this brief guide about what this new piece of guidance means for you.
There are two new pieces released: Revenue Ruling 2019-24 and frequently asked questions. According to Chuck Rettig, IRS Commissioner, the goal is to “help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules”.
There are five interesting points for cryptocurrency investors:
Hard Forks: if You Got Units of New Crypto, You Have Gross Income
Revenue Ruling 2019 – 24 covers the tax status and treatment of cryptocurrency hard forks. It defines such terms as “hard fork”, airdrop”, and explains different situations where taxpayers do or do not have gross income as a result of an airdrop following a hard work. The rule is pretty simple: if a taxpayer does not receive crypto units as a result of a hard fork, he/she does not have gross income. On the opposite side, if as a result of an airdrop following a hard fork you get units of new cryptocurrency, you do have gross income.
You Must Recognize Capital Gain or Loss
FAQs provide additional guidance and reconfirm that taxpayers must recognize capital gain or loss when selling crypto, also mentioning that a short-term capital gain or loss can be recognized if a taxpayer held the virtual currency for one year or less before selling or exchanging it.
Tax Lots: You Can Choose which Units of Crypto Were Involved in Transactions
They also describe the situation where you own multiple units of the same cryptocurrency that you purchased at different times with different basis amounts. It’s interesting that the IRSs states that in this situation “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.” The best way to choose them and save on your taxes is to use ZenLedger. With our automatic reports you can identify the cost basis or value of your crypto when purchased and sold, and thus choose the best option.
Transfers are not Taxable Events
The IRS also elaborates on transfers of cryptocurrency and confirms that “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” the transfer is not considered as a taxable event. This is very good news for crypto holders because some exchanges including Coinbase count withdrawals as taxable events, which means that now you can refile your taxes for the previous years and ask for refund (ask us how).
It’s Your Responsibility to Maintain Your Records
Finally, the IRS states that crypto owners must maintain all records including receipts, sales, exchanges, “or other dispositions of virtual currency and the fair market value of the virtual currency.”
Using a tax tool like ZenLedger will help you maintain this information and make it an easy task. Sing up for free now, we have a one-year refund policy – no questions asked.
- Recorded webinar with Andrew Gordon, JD/CPA about the IRS letters 6174, 6173, CP2000, and how to stay compliant
- IRS letters 6174, 6173 for Crypto Taxes
- Have you received an IRS Letter CP2000? Here are your next steps
- New Crypto Rules Could Impact the Market
- IRS Guidanceon the tax treatment of transactions using virtual currencies
- The noticefrom the IRS website regarding letters 6174, 6174-A and 6173