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IRS Issues New Tax Law On Cryptocurrency Investors
As part of an extensive effort to accommodate taxpayers and to implement the tax laws in a fast-changing area, the Internal Revenue Service (IRS) issued additional pieces of guidance on tax treatment for taxpayers who are engaging in transactions that involve virtual currency.
Cryptocurrency bearers know more about what the IRS expects on their tax returns, and it’s because of the latest guidance from the agency. Here’s what you need to know about the most recent Virtual Currency law guidance of the Internal Revenue Service.
What is Virtual Currency?
Virtual currency is a digital presentation of value that works as a store of value, a unit of account, and a medium of exchange. In some areas, it functions like a real currency. However, in the U.S, Virtual Currency doesn’t have legal tender status. Cryptocurrency is another type of virtual currency that uses cryptography to make sure the transactions that are recorded digitally, such as Tempo, DAG, or Blockchain, are secured.
Alternative For Real Currency
Virtual currency that acts as an alternative for real currency, or which has an equivalent amount in real currency, is also called convertible virtual currency. Some examples of convertible virtual currency are V-bucks, Roblox, Ether, and Bitcoin. You can digitally trade virtual currencies between different users, and you can also purchase them or exchanged them into other currencies, whether it’s real or virtual.
New Cryptocurrency Tax Guidance
Last October 9, 2019, the IRS released a new ruling and a frequently asked questions documents that inform virtual currency investors and their tax consultants how the IRS expects them to report the income from their assets. Since 2014, the guidance is the first and comes at a perfect time since tax auditors are progressively on examining people with investments in cryptocurrency.
The agency requires taxpayers to keep an eye on their crypto transactions to verify how much they purchased so that they can identify how much they still in debt when they sell. An investor should also record transfers of coins between two accounts, also called as wallets, to show to the Internal Revenue Service that the transaction doesn’t include tax.
The new guidance applies existing and well-established tax laws, which includes a requirement that holdings held for not more than a year are taxed at higher rates for their short-term capital gains. Those assets held for a more extended period are eligible for the preferential rates of 23.8%.
The IRS had a hard time to impose tax rules on digital currencies in recent years because investments with cryptocurrency earned value and popularity. Until this latest guidance, investors and their tax consultants had quite small input from the IRS, and they need to make intelligent guesses about how to report and provide payment for the taxes from virtual currency transactions. Some taxpayers never provide a report of their operations.
Airdrops and Hard Forks
The updated guidance indicates that taxpayers must pay their income taxes when a coin is divided into a transaction, which is also called as ‘hard fork,’ and when coins are dispensed through what is known as ‘airdrop.’
One of the disadvantages of this new guidance is that a third party can establish tax reporting agreements for you by foisting on you an unwanted airdrop or forking a network where you own some coins.
In the end, taxpayers could owe some penalties if they’ve decided not to pay for the taxes on some of their transactions, even if the IRS didn’t publish instructions yet, and taxpayers could have accepted a different arrangement.
In recent months, the IRS focused on cryptocurrency after they issued no guidance rules in the area in five years. And earlier this year, they sent more than 10,000 letters to the cryptocurrency holders to warn them that they might receive penalties for ignoring taxes on their digital investments.
As per the IRS Commissioner Chuck Rettig, the IRS wants to help the taxpayers understand why is it crucial to follow the reporting requirements. Also, the agency intends to take steps to guarantee equal enforcement of the tax laws for those taxpayers who don’t adhere to the rules.
Cost Basis
The new document of the IRS also presents a long-awaited explanation on how taxpayers can identify the fair market value or cost basis or coins gained as income. You will be able to calculate the cost basis by adding all the money spent to earn the crypto, which includes commissions, fees, and other acquisition costs in U.S. dollars.
Another issue addressed by the new guidance of the IRS is how to find out the cost basis of every unit of cryptocurrency that’s disposed of as a sale or taxable transactions. This new guidance also permits “first-in, first-out” accounting or particularly recognizing when the sold cryptocurrencies were purchased.
For instance, you bought your first unit at $6,000 and your second unit at $3,000, and then you decided to sell one of your units. You can associate the unit, or you may want to use ‘first-in, first-out.’ From a tax planning point of view, you may want to be particular about which unit you may want to use ‘first-in, first-out’ or which one you want to sell because sometimes you might want a loss, and sometimes you want a capital gain.
How Can Red Road Legal Help
Red Road Legal has already worked closely with corporate clients and other individuals to discuss the tax complexities of cryptocurrency. Also, we have gone beyond straightforward compliance to assist both start-up founders and individual cryptocurrency investors’ plans for tax and other accounting concerns that they may experience when looking to raise funds through their Initial Coin Offering or ICO.
Our team involves people who share the same passion for blockchain technology and cryptocurrency assets. Whether you’re a long-term ‘holder’ of bitcoin looking for a tax expert who speaks your language or an executive searching to understand how the new IRS guidance could affect your business, Red Road Legal can help you assess and weigh the risks of cryptocurrency tax scenarios, and consider possible tax treatments. Call us now to tackle your specific tax situation!