IRS Offers Fresh Guidance for Cryptocurrency Holders
The IRS has released its first cryptocurrency taxation guidance since 2014, when it ruled that all virtual currencies are property and taxed as such. According to Bloomberg, several notable accountants and lawyers see this is a great move, as it gives investors more clarity and paves the way for reasonable regulation, October 9, 2019.
Treatment of Cryptocurrency
The IRS has released a ruling and a Q&A document to help investors in the space understand what the tax agency expects from them.
To call the ruling cumbersome would be an understatement. Tax assessees are expected to report each and every transaction they make in order to prove that the price and tax rate they are paying for their cryptocurrency is justified.
Holdings that have been accumulated for over a year are charged as per the rate for long term capital gains, while trades under a year are subject to short term capital gains.
If an investor transfers cryptocurrencies from one wallet of theirs to another, they have to prove that fresh cryptocurrency wasn’t sent to a particular account by showing the transaction between the two addresses.
If unable to prove this through requisite transactions, the assessee will be double taxed.
Thus far, the IRS has grappled with how to tax and treat cryptocurrencies. The first sign of their intent to bring stringent regulation to the space came in the form of warning letters to investors who used Coinbase. It was further revealed that the agency is building tax evasion cases against several entities that deal with cryptoassets.
One of the more important takeaways is that hard forks and airdrops are considered taxable events.
Reception of IRS Guidance
Professional tax auditors and accountants are, on the whole, satisfied that the IRS has helped offer some amount of clarity. However, they do acknowledge that there is still a lot left unanswered and this is just the first step to better taxation.
One fairly common criticism is that the IRS expects this guidance to be retroactively applied. This means investors could be hit with a penalty for the mistreatment of cryptocurrency during 2018.
Although tax professionals aren’t really concerned about this, clients are getting incredibly anxious due to the mixed signals from various regulators.
Most professionals in the space acknowledge that while the IRS can issue tax guidance, they don’t have much other power. Before setting up a detailed framework for the treatment of cryptocurrency, Congress and the Treasury must decide the course of action.