Tax laws for cryptocurrency
Cryptocurrency Tax Laws: For the past five (5) years, the IRS has focused on cryptocurrency. Even with the publication of the Revenue Rule 2019-24 and the Notice 2014-21, many questions about cryptocurrency and Bitcoin (terms that are used synonymously in this article) remain unanswered – especially in the offshore and international area of cryptocurrency.
In the past few years we have seen:
Taxpayers with cryptocurrency therefore need to know the basic tax rules.
We’ll summarize the basics of U.S. cryptocurrency tax laws.
Increased IRS Cryptocurrency Tax Law Enforcement
The cryptocurrency tax law has taken over where the Swiss banking business left off.
While cryptocurrency is a well-respected (and lucrative) investment vehicle today, the Internal Revenue Service still links cryptocurrency to Silk Road and the Dark Web.
The IRS is trying to reclaim the estimated billions of dollars in off-balance sheet taxpayers ‘money that comes from taxpayers’ failure to properly comply with cryptocurrency tax rules – and they are stepping up enforcement.
To date, the IRS has not provided final guidance on all issues related to cryptocurrency and US tax law.
However, over the past few years the service has added some additional clarifications to help people comply with tax rules.
This article is by no means a complete guide to all things cryptocurrency. It’s the starting point for those of you who may have sold or exchanged (or are considering) cryptocurrency, invested in cryptocurrency funds, or just watched your investments skyrocket and are now considering a sale.
Rev Ruling 2019-24 (Gross Income)
The 2019-24 revenue regulation contains some explanations on the taxation of cryptocurrency.
The judgment contained two main themes:
- If a person owns cryptocurrency and then a hard fork occurs (similar to a US stock split), is there taxable income?
- What if a person receives drops of air according to the hard fork?
While the judgment is very lengthy, the general statement is that a simple hard fork would not result in a taxable income because the hard fork did not result in a taxable event.
However, if the taxpayer also receives air drops with new cryptocurrency according to the hard fork, something has been gained (air drops) and therefore the air drops are taxable income.
Frequently asked questions about the cryptocurrency tax
Here are some of the basics of cryptocurrency tax law:
Cryptocurrency tax on the real estate exchange (example)
For example, suppose you wanted an asset that your friend Michael owns and that has an FMV of $ 10,000.
Your cryptocurrency is worth $ 8,500 and you paid $ 8,500 for it, but Michael desperately wants your cryptocurrency because after reading an article about cables, newbie Michael is convinced that your cryptocurrency will appreciate.
Hence, you are swapping your $ 8,500 worth of crypto for its $ 10,000 worth of assets.
From the perspective of the IRS, you “got” a fortune worth $ 10,000, but you only “raised” $ 8,500.
Therefore, the property in your hand is now worth $ 10,000 (FMV on that date) – and you’ve made $ 1,500.
This is not a “gift,” so the carryover rules do not apply.
And even though no money was exchanged, you will be taxed on the profit of $ 1,500. If you sell it later, the base will be $ 10,000.
This is important, especially when income values are rising, as you want to make sure you have some liquidity when the helmsman (or helmsman) knocks.
You received cryptocurrency as income
If you receive cryptocurrency as income, that crypto is reportable as normal income and is taxed as income.
For example, if you are a consultant and one of your clients paid you for services in cryptocurrency, that income will be taxed as self-employment income on your tax return.
On the other hand, the employer would deduct the cost of the payment from you, just as the employer would deduct other forms of payment for services rendered.
The employer would not deduct it as a “sale” but as an expense.
Mining & Tax laws for cryptocurrency
Mining for cryptocurrency is a bit similar to mining for gold.
Often times, cryptocurrency mining is done in the hopes of receiving a reward for a job well done and verifications completed – but a payout is not guaranteed.
How the tax regulations apply to income from mining depends on the nature of the service.
In other words, is the person calling this Business or trade, or if it’s just one hobby.
Hobbies have some losses that may have occurred, but often they are limited as they are not business per se.
Capital gains (or losses)) & Cryptocurrency Tax Act
Often times, the income from the cryptocurrency will result from capital gains.
For example, Jennifer bought a $ 80,000 cryptocurrency that is now worth $ 600,000.
She wants to sell the cryptocurrency at fair market value, but wants to know how it is taxed.
The capital gain sale of crypto is the same as any other sale of assets.
In other words, if Jennifer’s adjusted base is $ 80,000 and she sells the cryptocurrency for $ 600,000 and makes a profit of $ 520,000.
If the gain is a short term gain it will be taxed at its progressive tax rate, and if the gain is a long term capital gain it will be taxed at either 15% or 20%.
Dividends or interest
If your cryptocurrency is pooled in a fund that has generated interest, dividends or capital gains, it will be taxed according to its character.
Practical tip: If your pooled cryptocurrency fund is in a foreign fund, be aware of possible tax treatment by PFIC.
Soft forks, what are they?
This is generally just a change from software / technical issues and is usually not a chargeable event.
About a year or two ago, the IRS announced that it would not develop a “stand-alone” program for voluntary disclosure of cryptocurrencies.
If you are not compliant, you should consider voluntary disclosure domestically or abroad.