The United States Internal Revenue Service (IRS) announced today the release of new tax guidance, answering the most common questions posed by cryptocurrency holders since the agency’s last crypto tax guidance in 2014.
The new guidance as per the IRS release includes a five-page document and an updated FAQ page, which will now augment the 2014 rules and become binding on taxpayers reporting crypto transactions in their tax filings.
Notably, the five-page document sought to answer a pressing question posed by a delegation of twenty-one U.S lawmakers led by Rep. Tom Emmer, who asked the IRS to provide further guidance about how crypto holders should report events involving cryptocurrencies received as a result of a hardfork or an airdrop.
In responding to that inquiry, the IRS requires that taxpayers treat such cryptocurrencies if under the individual’s control as “an ordinary income equal to the fair market value of the new cryptocurrency when it is received.”
However, if a crypto holder does not receive new cryptocurrencies following a hardfork, or an airdrop, then they “don’t have taxable income,” the new IRS document explained.
The guideline also sought to address other matters such as how a crypto user should determine the fair market value of filing tax reports on cryptocurrencies that they recieve as income from mining or the sale of goods and services.
It noted that a user could determine the fair market value (cost basis) of such cryptocurrencies by calculating the total equivalent sum in dollar spent in acquiring the crypto, including fees, commissions, and other costs.
No Exemption for Transactions Below a Certain Threshold
Noteworthily, the new IRS guideline does not treat cryptocurrencies like fiat when it is used for day-to-day transactions. Instead, the tax regulator stuck to its treatment of cryptocurrency as property, indirectly discouraging the use of the new payment tool over fiat.
For taxpayers, the guideline specifies that there won’t be any exemption for the use of crypto to pay for services, arguing that paying somebody for service will "result in a capital gain or loss."
Taxpayers thus are expected to report such transactions by calculating “the difference between the fair market value of the services [they] received and [the] adjusted basis in the virtual currency exchanged.”
IRS to Penalize Crypto Tax Offenders
In line with earlier letters that the IRS sent to ask crypto holders to file and pay up taxes on their digital assets, the tax regulator warned that it would soon bring penalties on tax defaulters.
Today’s announcement read,
Taxpayers who did not report transactions involving virtual currency or who reported them incorrectly may, when appropriate, be liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.