IRS specifies tax treatment policy on Bitcoins

Did you buy or sell bitcoin in 2019? Be ready to pay taxes for it in 2020.

On Oct. 9, the IRS released a ruling and a frequently-asked-questions document that provides updated direction about the tax obligations for cryptocurrency users.

In the past, all digital assets were taxed as property, a broad distinction that taxed all cryptos as a singular asset class, irrespective of use case or intent.

As many noted, this system failed to account for the specific use cases of today’s crypto assets, and it made many applications a logistical nightmare.

Now, there is a bit more nuance.

For example, rather than subjecting all investments to the same tax structure, investors holding digital assets for more than a year can avoid higher short-term capital gains rates. Based on these new guidelines, they can qualify for a 23.8% preferential tax rate.

Unfortunately, other crypto uses cases, like paying for services, continue to be taxed as capital gains events, something that still needs to be addressed in future rulings.

In addition, the ruling introduces a tax responsibility for coins attained through hard forks and airdrops. Hard forks, which are significant changes to a blockchain that produce a new blockchain ecosystem and, subsequently, a new digital currency, are now viewed with greater nuance as the token distribution that often follows a hard fork can occur in many different ways.

Similarly, users who received tokens through an airdrop will be assessed taxed based on the price at the actual time of receipt.

More specifically, the IRS now differentiates between hard forks that do not provide investors with new cryptocurrency and those that issue new, valuable tokens.

As the department explains, “If a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you receive the cryptocurrency.”

Moreover, the IRS equates hard fork token values with the “fair market value of the new cryptocurrency when it is received.”

Previously, the IRS did not differentiate between token acquisition methodologies. Buying cryptocurrencies on an exchange was treated in the same way as receiving them through an airdrop or in exchange for goods and services.

Ultimately, the new guidelines are intended to clarify crypto tax responsibilities by taking more of the guess-work out of the equation. As IRS Commissioner, Chuck Rettig, said in a recent statement, “We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”

Basically in 2020, the tax laws for cryptocurrencies like bitcoin are more pronounced and less under the capital gains umbrella.

Have more questions? Ask them on our tax forum here.