In the largest update to federal cryptocurrency reporting guidelines since 2014, the IRS recently issued new Bitcoin tax guidance for business entities and individuals. Taking the form of FAQs, the updates, which were released earlier this October, clarify and expand upon several issues that were not adequately addressed in the original guidelines – notably, the tax treatment of income derived from “hard forks,” which occur when a blockchain network (i.e. public Bitcoin ledger) is altered so radically that the blockchain divides, resulting in the creation of new currencies like Bitcoin Cash or Bitcoin Gold. For more information about hard forks (and what they mean for your tax bill), explore our cryptocurrency archives, or consult our Bitcoin tax lawyers for personalized, one-on-one assistance. Otherwise, continue reading to learn about the new IRS Bitcoin guidelines for taxpayers, including key points about hard forks, “airdrops,” and whether the resulting income is taxable.
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IRS Releases Updated Cryptocurrency Tax Guidelines for 2019
In 2014, the Internal Revenue Service unveiled its first set of cryptocurrency guidelines – which, in the intervening years, have been criticized for their lack of specificity (notably by TIGTA in a 2016 report). In a classic case of “better late than never,” the IRS has finally issued new and improved guidelines, which, fortunately, are more explicit than their precursors. Some highlights from the updated guidelines are discussed below.
- How is virtual currency classified for tax purposes in 2019? Despite being termed as currency, digital currencies are in fact treated as property for tax purposes – a contradiction which can be confusing for those unfamiliar with the regulations. This classification is unchanged from the previous guidelines, which also treated Bitcoin (and other virtual currencies) as property.
- Note: Following the Tax Cuts and Jobs Act (TCJA), 1031 or “like-kind” exchanges are generally restricted to real property (namely real estate), meaning Bitcoin no longer qualifies for like-kind exchanges.
- If somebody pays me in Bitcoin, do I have to report it as taxable income? In short, yes. As the IRS explains, “When you receive property, including virtual currency… you recognize ordinary income” (as opposed to capital gains). The same rule extends to both employees and independent contractors who receive Bitcoin compensation for services performed. As the guidelines further explain, “The amount of income you must recognize is the fair market value of the virtual currency, in U.S. dollars, when received” for the services rendered.
- Note: Intentionally failing to report U.S. or offshore income – including income from cryptocurrency – constitutes tax fraud, which is punishable by high fines, prison time, and supervised release. Be advised that Bitcoin tax evasion is a high enforcement priority for the IRS.
- What happens if my Bitcoin goes through a hard fork? The answer depends on whether the hard fork caused you to receive new cryptocurrency, such as Bitcoin Cash. If you did not receive new virtual currencies due to the hard fork, you did not receive taxable income. If you did receive new digital currencies as a result of the hard fork, you have taxable income if the fork was followed by an “airdrop,” which the IRS defines as “a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses.” (Interestingly, the executive director of cryptocurrency research nonprofit Coin Center, Jerry Brito, stated the IRS “seems confused about the nature of hard forks and airdrops,” expressing a concern “that third parties can now create tax reporting obligations for you by simply forking a network whose coins you own, or foisting on you an unwanted airdrop.”) Additionally, for the airdrop income to be taxable, you must “have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of” it.
California Bitcoin Tax Lawyers Providing IRS Audit + Appeals Representation
The IRS’ latest guidelines offer clearer, more detailed terms and provisions than the previous versions, making it somewhat easier for taxpayers to comply with the law successfully. However, as the rules continue to complexify and evolve, taxpayers are advised to consult with a cryptocurrency tax attorney. Working with a skilled tax lawyer ensures that you receive the latest and most up-to-date regulatory information, while simultaneously providing you with protection in the event of a Bitcoin-related tax audit or IRS criminal investigation. You should also have legal representation if you are contacted by the IRS regarding another taxpayer, such as a former employer or spouse.
At the Tax Law Office of David W. Klasing, we are highly experienced in the specialized areas of cryptocurrency tax compliance and Bitcoin audit defense. Whether you have received an IRS letter about unreported cryptocurrency, are concerned about potential Bitcoin-related tax evasion charges, or would like to appeal an unfavorable Bitcoin tax determination following an IRS audit, we provide award-winning service throughout California, 24/7. Contact us online today to arrange a reduced-rate consultation, or call the Tax Law Office of David W. Klasing at (800) 681-1295.
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