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IRS Considering Tax Guidance for Hard Fork "Hodlers"

IRS Considering Tax Guidance for Hard Fork “Hodlers”

Reading Time: 3 minutes by on September 1, 2018 Bitcoin, Blockchain, Business, Finance, Investment, News, Regulation

Over the past two years, there have been many airdrops, hard forks, scam coins and other events. As investors scramble to participate in these events, CPA’s and tax professionals are struggling to keep up with the rules and regulations. The tax man always needs their due, and the failure to report and pay taxes has brought down many high profile individuals.

The Hard Fork Dilemma

Over the past ten years, the IRS has been very slow to issue guidance on cryptocurrency events as it relates to tax law. Many of the tax laws are not well suited to provide advice on how to treat common cryptocurrency events. The official guidance that the IRS has issued is the 2014 notice as well as the helpful reminders.

Jerry Brito with Coin Center has published an article outlining the lack of inaction by the IRS and the confusion that this is causing among cryptocurrency investors and users. Jerry points out the risks:

“In the absence of useful guidance, taxpayers have filed their returns in a state of genuine confusion about the state of the law. Unfortunately, this puts them at risk of being assessed penalties on top of their tax liability, should they get the law wrong.”

The most notable event that has affected large numbers of cryptocurrency investors is the Bitcoin and Bitcoin Cash Fork on August 1, 2017. Anyone that was holding Bitcoin on that day received an equal number of Bitcoin Cash tokens. The question remains as to whether or not this is a taxable event that requires the immediate payment of taxes. And if it does, what is the cost basis and the sale basis of this event?

In the early Dot-Com days, rather than paying cash, many employees were paid in stock options. Many employees found themselves owing to large tax bills due to the exercise of those options even as the stock continued a decline.

No Guidance, Lot of Uncertainty

Many tax preparers today are fearing a similar backlash from the IRS due to the uncertainty created around the IRS’s lack of guidance. The American Institute of CPAs and the American Bar Association are both pleading with the IRS to create a safe harbor until such guidance is issued. Furthermore, they are proposing a set of rules for all Americans investing in cryptocurrency to follow.

Most CPA’s are offering the advice that if investors are holding for the long term, that they are treated per long-term gain rules.

Marvin Madorsky, CPA with Block Advisors, Colorado offers the following advice:

“Under current rules…there is no taxable transaction until the crypto currency is sold. At that time, a gain or loss is calculated (proceeds from sale less cost basis). The cost basis is usually but not always the purchase price. If the crypto-currency has been held for one year and one day or longer, the transaction is long-term and if not, it is short-term for capital gains purposes.”

Both the AICPA and American Bar Association support this view:

“We acknowledge that the temporary treatment may result in capital gain as opposed to ordinary income treatment (assuming the cryptocurrency is held as a capital asset), but by assigning a zero value, it preserves tax on the full value of the forked currency for taxation when the taxpayer sells it.”

On the other hand, Airdrops are treated as a bonus. According to the AIPCA, US taxpayers should report this as ordinary income.

“Virtual currencies received from airdrops are akin to a bonus or a free prize. Taxpayers should include the amount as ordinary income based on the fair value of the token on the date of receipt.  The income recognized becomes the basis in the virtual currency. The holding period begins on the date of distribution and is the first day of the holding period.”

Users Remain Unaware

However, many long-term holders are unaware of these taxable events. Long-term holders that keep the private key in a safe would not automatically know to file the Safe Harbor election form (on page 9). This form allows the taxpayer to notify the IRS of the event while maintaining the long-term capital gains stance that the taxpayer desires.

Marvin Madorsky further opines on this difficulty:

“Unlike traditional investment accounts, cryptocurrencies do not issue 1099’s or other forms when there is a taxable event.”

BTCManager contacted the IRS to understand the treatment of tax laws on cryptocurrency investments better. The IRS representative offered the following:

“We would encourage any member of the public with complex tax situations to consult with a tax professional. Until congress provides new laws and statues, the IRS must apply existing laws to emerging technologies.”

A request for comment from members of the Joint Committee on Taxation, the Senate Committee on Finance and the House Committee on Ways and Means were all unanswered.

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