IRS has just issued a new guidance on the taxation of cryptocurrency. It is its second since 2014 and it is to be expected that other nations, including some which are part of the European Union, would follow closely any guidance the US may provide in the area of crypto taxation and may follow course.
This new guidance includes a Revenue Ruling stating that “hard forks” of cryptocurrency do not create taxable income if the holder does not receive new cryptocurrency as a result of the hard fork.
There has been not much IRS guidance on cryptocurrency since the last one on 2014, even though hard forks of Bitcoin occurred as far back as late 2014 (the Bitcoin XT event, followed by Bitcoin Cash and Bitcoin Gold in 2017).
A hard fork, as it relates to blockchain technology, is a radical change to a network’s protocol that makes previously invalid blocks and transactions valid, or vice-versa. It requires all nodes or users to upgrade to the latest version of the protocol software. Its taxation relevance resides in the fact that, when a hard fork occurs as a result of changes to a distributed ledger underlying a crypto, which trigger a split from the original distributed ledger, which in turn may result in the creation of new cryptocurrency on the new ledger.
Hard forks are sometimes followed by “airdrops”, i.e. distributions of cryptocurrency units to the distributed ledger addresses, in which a holder does receive new crypto for free. The Revenue Ruling states that an airdrop results in taxable income when the holder can exert dominion and control over the new cryptocurrency, and the holder’s taxation basis will be the fair market value of the new cryptocurrency.
Through this new Guidance the IRS also re-affirms its position that crypto is treated like property for tax purposes. It states that, as with other property held for investment, holding crypto for one year or less will trigger short term capital gains and losses and that crypto received in exchange for services are wages triggering withholding obligations.
Clarity on the IRS’s position on certain cryptocurrency reporting issues is much expected and most welcome, but it is hoped that the IRS and the Department of Justice will not apply the new Guidance documents retroactively.
[Sources: Lexology, Investopedia]