The IRS just released long-awaited guidance on several cryptocurrency taxation questions that practitioners have been clamoring the agency to address for the last several years. Without a doubt there is going to be much discussion and debate about just what this updated guidance means, from both a taxation and reporting perspective.
This updated guidance follows shortly on the heels of the announcement during July and August that the IRS would be stepping up enforcement and collection. Cryptocurrencies, no matter what the iteration, are here to stay as a component of the economic landscape.
Implications of this updated guidance will require numerous articles, podcasts and webinars to fully analyze, but here are a few key takeaways:
- Stablecoins are officially part of the conversation. The crypto conversation may have started — and will still be led by — Bitcoin, but stablecoins are a fast-growing space that have captured the attention of accounting and financial services practitioners. Additionally, with the development and launch of JPM Coin and Libra, including the clarification that cryptocurrencies convertible into “real” currency fall under the virtual currency seems a straight-forward inclusion. Especially with the scrutiny Libra continues to receive, bringing these items officially into the guidance should not come as a surprise.
- Taxation treatment has not materially been changed. Despite requests, including one by the AICPA, for a de minimis exclusion that would spare some taxpayers from having to comply with full reporting and taxation requirements, that does not appear to have been included. As of this update, any cryptocurrency gains and losses — no matter the dollar amount — have to comply with full reporting requirements. Tax implications of paying for/being paid for goods or services with crypto also seem to remain the same, with virtual currencies remaining classified as property.
- Hard forks, soft forks and airdrops were addressed. Perhaps the biggest open item for taxpayers and tax preparers for the last 12 to 18 months, the IRS has now provided some clarity on the issues of forks and airdrops. If a hard fork occurs and a taxpayer does not receive any new cryptocurrency, there is no taxable event. If, however, and either through a hard fork or airdrop (which are technically two separate items), new cryptocurrencies are received, there is a taxable event. Basis and income implications related to these new cryptocurrencies are determined by the fair value of these cryptocurrencies as of the date these items were recorded on the ledger of record. One new question that rises after this guidance is whether or not the IRS will differentiate hard forks from airdrops in additional forthcoming guidance. Soft forks do not generate a taxable event due to the lack of new cryptocurrency creation.
- If a taxpayer donates virtual currency to a charitable organization as described under IRS Code Section 170(c) there is no recognition of incomes, gains or losses. Charitable deductions are generally equal to the fair market value of currency at the time of donation (if held for more than a year), or the lesser of either the taxpayer’s basis in the currency or current fair market value if the currency was held for less than one year.
- Accounting for cryptocurrencies. The IRS has issued some additional clarification as to the accounting processes for these virtual currencies. Taxpayers can — if they have information linked to the date and time that the specific unit was acquired, the cost basis and fair market value of that unit at the time of acquisition, the time and date information of when this specific unit was sold, and the fair market value of the specific unit when it was sold — account for these transactions under a specific identification method. Otherwise, the FIFO method of accounting should be used.
In addition to these items, the IRS did provide updated and expanded guidance and clarification connected to determining cost basis of virtual currencies, the records necessary to be in compliance, implications of receiving transactions without an exchange being involved and several other important areas. More guidance and clarification are still required, but this first update since 2014 did address and answer some of the pressing items that have been driving the tax and accounting conversation for the last several years. Through analysis of the forthcoming Rev. Rul 2019-24, due to be released soon, practitioners may be able to glean additional guidance.
Whatever happens next, cryptocurrency taxation looks situated to remain a high-profile area of focus for the foreseeable future.