IRS issues additional guidance on tax treatment for cryptocurrency
irs.gov
irs.gov
It seems like this will incentivize people to sell off new tokens immediately, in order to pay the taxes they incurred during the fork.
To me it seems very unintuitive to tax a hard fork. It is like taxing a stock split. Your asset hasn't really changed, it is just now represented in a different way.
Another weird thing about these taxes is that they assume that one of the forks is the "real asset" and the other fork is the "new asset". In practice, it seems like a lot of times a fork happens along with a lot of argument about which side of the fork is the "real" one.
Well, I guess the IRS does not see cryptocurrency the same way as my intuition would.
> A21. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.
https://www.irs.gov/individuals/international-taxpayers/freq...
So with e.g. Bitcoin / Bitcoin Cash fork you would be doing ordinary capital gains, not income. You don’t have “new cryptocurrency”, you have the same cryptocurrency, but on two ledgers because of the fork.
You could read the ruling as saying that if you have coins on both the old system and the new system that you recieved an 'air drop' and owe taxes. Or you could attempt to read it as saying that you only received an 'air drop' if there was a "transfer" and not merely state copying.
The latter interpretation is more reasonable in effect but seriously frustrated by the total lack of guidance on setting the cost basis of the resulting assets! Also the language of the ruling comes very close to directly contradicting this interpretation: "Situation 1: A did not receive units of the new cryptocurrency, Crypto N, from the hard fork;".
The former interpretation is frustrated by the absurd result that users of eth, bcash, or other centrally administered frequently hardforking cryptocurrencies would owe income tax multiple times over for every one of those coins they own... even though the original systems have largely (but not completely) been ignored, and aren't valued as much. So what, are users of those systems supposed to have over and over against recognized ordinary income for nearly the total value of their holdings and sold the original coins and taken a capital loss on them (which they couldn't deduct against their ordinary income, except in a limited way)?
IMO, the most reasonable interpretation without a specific basis-splitting rule, given that the IRS divides a hard fork into a legacy ledger a and a new ledger would be that the basis value for the new ledger entries (being that they are created by the fork at no cost) is zero, with the legacy ledger entries retaining their original basis value.
It appears to be saying in situation 1 you have no N-coins at all. By exclusion, situation 2 would apply if you have the new coins and it clearly states taxes are owned on the market value in that case.
It's also not one free of unexpected negative consequences in the case where the new system doesn't have a low value. Consider, a number of altcoins with more centralized administration have frequently hardforked and the ticker symbol and most of the value went to the new system while the old system was largely devalued.
So your policy would end up constantly resetting the holding period for these assets and the tax treatment would also be disadvantaged because it would tend to create short term gains and long term losses essentially out of nowhere.
E.g. You own Ethereum for two years. Then Eth hardforks to undo the execution of the DAO smart contract and return the lost funds eth's administrators. The original Ethereum continues, but the value and ticker symbol follow the new blockchain. A month later you sell all your coins. Did you just create a short term gain of the full value of the coins and a long term loss?
The hard fork was ethereum's failure as a result of the technical inability to roll back the transactions the proper way (i.e., by just undoing the redactions themselves) and the tax law shouldn't be changed just for that.
The text is fairly clear on this point, that a hard fork may or may not be followed by an airdrop, because it has a separate entry for “hard fork followed by airdrop” and “hard fork not followed by airdrop”.
So if you have a hard fork, and your old coins are now on two forks, that’s not income. “Hard fork without airdrop.”
I am not sure what else “hard fork without airdrop” could possibly mean.
Agreed that the cost basis for these coins is unclear.
"A24. If you receive cryptocurrency from an airdrop following a hard fork, your basis in that cryptocurrency is equal to the amount you included in income on your Federal income tax return. The amount included in income is the fair market value of the cryptocurrency when you received it. You have received the cryptocurrency when you can transfer, sell, exchange, or otherwise dispose of it, which is generally the date and time the airdrop is recorded on the distributed ledger. See Rev. Rul. 2019-24. For more information on basis, see Publication 551, Basis of Assets." (I realize the FAQ may not be legally binding, but there it is.)
Some people, like the person I was responding to, are looking at Situation 1 in the ruling as saying that when a fork happens and there are two cryptocurrencies and you didn't receive any additional "new" cryptocurrency (just two, now independently spendable, copies of cryptocurrency you already had) that taxes aren't owed.
They adopt this reading in part because the only other interpretation of Situation 1 is that it's talking about an irrelevant and uninteresting case.
They imagine that you only owe taxes if in addition to the coins copied by the fork you also receive additional "air drop" units, Situation 2's 'owned 50, airdropped 25' contributes to that interpretation.
They think in situation 1 you have 50 coins of M and 50 coins of N and owe no taxes, and in situation 2 you have 50 coins of R and 75 coins of S and owe taxes on 25 S.
I think this interpretation doesn't work well, both because it's totally silent on the cost basis of the copied coins and because of the text at the top of page 5.
As a separate problem with this ruling, if you do adopt the view that when a fork comes into existence you "received" coins, there is usually no fair market value at that time because the coins were not tradable in any way until later. In some cases seen so far one side of the fork or another doesn't become effectively tradable for months, we may eventually see examples where a market doesn't form for years.
[In a few cases there is potentially a FMV at fork time, e.g. when there were liquid futures markets ahead of the fork (has only happened even arguably once, AFAIK), or when many market participants decided to give the new asset the old asset's ticker.]
The cost basis of the new coins is $0 because you paid nothing to acquire them. If they have value when received for some reason, they take on the value you claim as income in your tax return. This may be possible if for example other exchanges have already enabled transactions in that fork and established a value.
What exchange account? -- yes, many (IMO foolish) users keep coins in exchanges, many don't. :)
I'd love to read it the way you're reading it.
> The cost basis of the new coins is $0 because you paid nothing to acquire them.
The document states:
> When a taxpayer receives property that is not purchased, unless otherwise provided in the Code, the taxpayer’s basis in the property received is determined by reference to the amount included in gross income, which is the fair market value of the property when the property is received.
So I guess you'd take the position that if you got access to the coins at the instant of the fork, when there is no FMV yet, then you'd report $0 income and have a $0 cost basis. Otherwise, if your access was delayed and there was a FMV, you'd treat that as income and it would become your cost basis?
Doesn't matter, only that you use an exchange for the guidance to apply. If you receive the coins directly, this guidance isn't really relevant.
So I guess you'd take the position that if you got access to the coins at the instant of the fork, when there is no FMV yet, then you'd report $0 income and have a $0 cost basis. Otherwise, if your access was delayed and there was a FMV, you'd treat that as income and it would become your cost basis?
Yes, correct. If the forkcoin is worth $X at the time of receipt, you are taxed on $X income because your cost basis at the time is $0. But because you were taxed on $X, your cost basis is set to $X.
If you own bitcoin private keys, you already own coins on an infinite number of hard forks. You're just lacking a client to access them.
The IRS specifically refers to when you recieves the tokens, on chain, in a transaction.
If there is no additional data, in the blockchain, then it is not an airdrop, according to the IRS.
"A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A."
So I interpret the line "Crypto N is not airdropped or otherwise transferred", too mean that there are no additional transactions that are recorded on the new blockchain N to give people additional coins, but previous state is maintained, as maintaining state is not a transfer.
An airdrop would have to be an actual state change, "recorded on the distributed ledger", that says "These people now receive 200 coins". In the case of a normal hardfork, there is no transfer that is "recorded on the distributed ledger".
I interpret that as meaning some sort of additional transaction, on the blockchain.
If you notice, in situation 2, the key line to look at is as follows:
"The airdrop of Crypto S is recorded on the distributed ledger on Date 2 at Time 1 ".
It specifically says that something must be recorded on the ledger.
The reason why situation 2 needs to be called out, specifically, would be in the case of a developer, hard forking a coin, and giving themselves a developer dividend, for example. It would make sense why the additional transactions, that are "recorded on the distributed ledger" would need to be taxed, as it is referring to additional coins being airdropped.
Edit:
Ah, you were also referring to this line here:
" A did not receive units of the new cryptocurrency, Crypto N, from the hard fork"
I'd interpret this the same way. The user did not receive any units of the cryptocurrency. They had it all along. It would take an actual state transfer for them to "receive" it.
It sounds weird to say, but basically, they had these coins already.
There does not need to be a transaction on any ledger for the receipt of the forked coins to be income.
What makes them income is that you received the forked coins, whether that fork is a true fork or just a new ledger that is otherwise identical to the old one. The IRS doesn't care about those technical details.
Situation 1 would apply if for example you choose not to receive the forked coins or if for some reason your exchange didn't recognize the fork and thus never credited any new fork coins to you.
I don't know what it would even mean to have a "hard fork" which does not maintain the previous state of the blockchain.
Like, would that be talking about lite-coin, and arguing that it is technically a "hard fork" of Bitcoin?
Or would it be a "hard fork" which sets everyones balance to 0, but still maintains the old blocks from the fork? (For some unknown reasons...)
Both of those seem weird.
The document specifically calls out things that are recorded on the digital ledger though.
Some of these things have edited the prior state... heck even the purpose of the eth/etc hardfork was taking coins from the 'dao hacker' and assigning them to the ethereum foundation. There was some "united bitcoin" where you had to transact during some particular window to get granted coins, etc.
I agree that the case where there is a fork and where you don't get coins is degenerate-- plus the tax treatment in that case is obvious.
[FWIW, I think the way you're reading it has fewer absurd effects, I'm just struggling to convince myself that they actually meant what you're describing.]
The more I look through this ruling, the more it seems like it is only designed for people who hold their cryptocurrency at an exchange. At an exchange, the exchange officially declares which coin is the "new one" and which coin is the "old one", so that isn't a problem for users. Plus, there's a clear distinction with whether the exchange provided you with a new asset during the fork, or whether the exchange did not provide you with a new asset during the fork.
So if you just use Coinbase, this ruling is perfectly clear. If you control your own wallet, it doesn't make as much sense.
I think you're absolutely right. The guidance only makes sense through this lens. It's unfortunate that the IRS didn't base their reasoning on the technical characteristics of the underlying blockchains. There is a whole lot of ambiguity as a result.
Q27. I received cryptocurrency that does not have a published value in exchange for property or services. How do I determine the cryptocurrency’s fair market value?
A27. When you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, then the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs.
If there is not [yet] a published value at the time of the airdrop, A27 seems to suggest that "the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs". If you received the cryptocurrency in exchange for nothing, I'd conclude that the fair market value was $0.
(IANAL, IANYL, YMMV, etc.)
An old but entertaining example, what's the inheritance tax value of a famous work of art that is illegal to sell because it contains a stuffed bald eagle?
https://www.nytimes.com/2012/07/22/arts/design/a-catch-22-of...
If so, then there's probably no market for the asset at that instant, so the fair market value is zero?
When Ethereum hard-forked, some miners kept mining the old chain, now affectionately known as Ethereum Classic. Seems like Classic is the original asset and what we now call Ethereum is the new asset.
Let's say I paid $200 for 1 ETH before the fork, and after the fork I own 1 New ETH worth $195 and one 1 Classic ETH worth $5.
Do I now owe tax on $195 even though the total value of New ETH + Classic ETH equals my acquisition cost?
The taxable event is when the coin appears in your Coinbase account.
Oh, you have your own wallet? Well, the IRS wasn't really thinking about that case.
> Do I now owe tax on $195 even though the total value of New ETH + Classic ETH equals my acquisition cost?
Let's say for simplicity sake that all this happened within the same calendar year. Here's where you're at.
You bought 1 ETC for $200 and now it's worth $5. That's a $195 unrealized capital loss.
Let's say you acquired your ETH from the fork and it was trading at $5 when you got it. You now have 1 ETH that has a cost basis of $5. This represents a $5 realized capital gain, and a $190 unrealized capital gain.
If you disposed of everything within the same year, it would be a complete wash, as your $195 capital loss would offset your $(190 + 5) capital gain.
If you carried your positions into the next tax year, you'd have to pay taxes on the $5 your ETH was worth when the fork happened at the end of year 1. Then in year 2, you have a $195 unrealized capital loss and a $190 unrealized capital gain. This would yield a $5 net capital loss, which you could use to offset other capital gains or carry forward into future years, deductible $3000 per year for the rest of your life.
In reality what happened though is that both ETH went up and ETC went up because a fork of a currency is just a copy-paste, as they have no intrinsic value and their performance afterwards is frequently totally uncorrelated other than in the way the whole crypto "market" is correlated to BTC.
Just because someone "gives" you something, doesn't mean you accepted it and own it.
The standard they are appearing to apply is "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion".
Complete dominion, OTOH is easy to address. E.g. instead of mailing them the keys, I pull the public keys out of their website's SSL cert. They now have complete dominion.
Also, if the coin is not transactable it has no value.
You have to give the US government a certain amount of kudos for how it’s handled cryptocurrency so far; it’s been far from perfect, but you can tell they are trying to be accommodating and employ common sense.
That would just put cryptocurrency on similar footing as any other currency.
It's not like taxing a stock split. In a 1:2 stock split, you go from having 1 share of AAPL worth $100 to 2 shares of AAPL worth $50 each for a total of $100. It's the same ticker, and represents beneficial ownership of the same fraction of Apple, Inc.
A better analogy might be a dividend. If you hold 1 share of AAPL and it issues a dividend, you now have 1 share of AAPL and + $2.00. This $2.00 is totally unrelated to your ownership stake of AAPL (which of course cryptos don't represent anyways), new value, and you will owe taxes on this event. IMO a crypto fork amounts to a taxable distribution.
A capital gain in these circumstances is actually what you want, because it would be offset by a future capital loss. To your point, the original distribution "plants the flag" with respect to the amount it's worth. If the value drops to 1/3 by the end of the first trading day like a typical crypto pump-n-dump, when you then dispose of that asset, your capital loss from the sale offsets the capital gain from the "flag plant" and you only pay taxes on the new value generated.
It's actually quite fair.
> It seems like this will incentivize people to sell off new tokens immediately, in order to pay the taxes they incurred during the fork.
Not necessarily immediately but definitely by the end of the quarter or by the end of the tax year.
As such, you should recognize that loss in the same tax year as the fork occurred, which is why I believe the selling pressure would be towards the tail end of the tax year whether the price goes up (to cover taxes on the distribution) or down (to recognize and true up losses). If you did that in the same tax year as the fork, you'd never have to carry forward the losses. Both the gain and the loss occur in the same year and cancel out (i.e. you'd never lose more than you gained from the fork).
I expect this ruling to be challenged and ultimately settled in Tax Court. (I have zero investments in crypto, so no dog in the fight, but this seems patently unjust to me.)
I couldn't disagree with you more about this being fair. it creates a market hazard (dumping), and it fails to recognize the conjoined-value at time of fork. Were the futures value treated as the cost-basis of the new coin, that would be fair.
Moreover, this is a clever way for the IRS to learn your complete BTC holdings AND to seek stricter legal precedents against you.
All in all, this is very bad for crypto
A dividend is in fact unrelated to your ownership stake. Before a dividend and after a dividend, you continue to own the same percentage of the underlying entity. You could use the dividend to in fact increase your beneficial ownership stake by re-investing it in the security. What has changed is the market value of your shares -- and to your point, by the dividend amount.
With a crypto fork, what's happening is someone is creating a new asset out of thin air, by copying an existing chain. When that happens, you now have two "assets" X and Y. The value may not even be correlated in any way. If I forked the BTC chain to create MagicPonziCoin2, it's not going to change the value of BTC whatsoever. This is recording that there's some initial value to the post-fork coin. If the fork affects the original holding, you can recognize your gain or losses by selling. If the post-fork coin changes in value, you can recognize your gain or loss there by selling relative to the value at your acquisition.
I think a hard fork is most like a company breaking itself apart (like eBay/PayPal into, well, eBay and PayPal). In the case of eBay/PayPal, each holder of the eBay stock also got PayPal stock 1:1, just like in a hard fork.
I did some quick research into this and found that the issuance of PayPal stock was NOT a taxable event: https://www.sec.gov/Archives/edgar/data/1633917/000119312515...
The relevant quote: "The separation will provide current eBay stockholders with equity ownership in both eBay and PayPal. We expect that the distribution of PayPal common stock will be tax-free, for U.S. federal income tax purposes, to eBay stockholders."
The reason this is similar to a hard fork is that, in theory, the two chains will splinter their hash power, their usage, and at the time, no REAL value is being transferred/created because of the fork (in theory).
There is, of course, the abstract concept that I'm calling "anti-synergy": when two groups are suffering being together and there is more global value in the world when they're apart.
Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like_ this has been happening in past 2 years. It's an example of irrational market behavior. There is no* reason hard fork should create value.
*Sibling comment is also correct. A hard fork may create value by separating two entities which can thrive separately better than they can together. Similar to how a company that is shelling out dividends may be more valuable than a company which hoards cash.
However, in a rational market this information would be incorporated into prices _before_ the hard fork: there is still no rational reason for the total price of assets to magically jump after the event.
Not necessarily. I don't see how that follows at all.
>Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like_ this has been happening in past 2 years. It's an example of irrational market behavior. There is no* reason hard fork should create value.
How does that matter to the IRS whether market is being irrational or rational?
>However, in a rational market this information would be incorporated into prices _before_ the hard fork: there is still no rational reason for the total price of assets to magically jump after the event.
The crypto market is full of hype and irrational actors
> Not necessarily. I don't see how that follows at all.
If you can make infinite money out of thin air by making infinite hard forks, go ahead. No-one's stopping you.
> >Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like_ this has been happening in past 2 years. It's an example of irrational market behavior. There is no* reason hard fork should create value.
> How does that matter to the IRS whether market is being irrational or rational?
I didn't say it matters to the IRS.
> >However, in a rational market this information would be incorporated into prices _before_ the hard fork: there is still no rational reason for the total price of assets to magically jump after the event.
> The crypto market is full of hype and irrational actors
We are in agreement here.
Let's say the chain is worth $100 unforked and the value of forking is $10. The value might be $105 if the market only thinks forking is 50% likely, and can remain uncertain depending on how much voting information leaks out. If the fork succeeds, value jumps to $110.
I'm not making this up out of whole cloth either, merger arbitrage funds make a living on these price jumps in equities.
As a meta comment, it's probably unwise to make such sweeping negative claims in a field as varied and immature as economics/finance. You'll always find broad exceptions, since the definitions are all made up by humans out of convenience.
This is more akin to my forking the GitHub repo for MySQL and calling it MySQLCash (MCH, naturally). It doesn't change anything about the original; that only happens if the new asset wages an adoption campaign like BCH/BSV/Bwhatever, in which case the origin story is irrelevant.
And remember, the value of a chain is not simply its code. In fact, you can argue that the code is NOT important AT ALL to the value of a chain, for the very reason that it is entirely open. The chain's valuation comes from the network - and arguably the most important of those (at least in the short term) - the users who transact on the chain, and the miners whose hash power push the chain forward, will splinter.
When a chain splits, the miners must make a decision on what percentage of their finite hash power should be allocated to each fork.
I'm actually of the belief that this analogy is VERY good.
In fact, the way this rule is written, it's not even clear that you have to copy the whole block chain. You could issue a new currency to any address and cause them a taxable event.
I suspect this rule wouldn't hold up in court.
The funny thing is that these are generally non-taxable if no cash changes hands: https://investinganswers.com/dictionary/t/tax-free-spinoff
If you had to pay market value for the forked coins they wouldn't be taxed when you received them.
I'm aware that there's situations where a CGT event occurs even without selling your asset, but this shouldn't be one of them.
You receive crypto worth $X that you paid $0 for. Thus, you have $X in income and owe income taxes on that. If you paid $Y for the crypto, then you had $X-$Y in income (similar to in-the-money stock options). Your cost basis would be $Y in the $X of coins, so if you ever sell them, then your income is $Z (value at time of sale) less $Y in capital gains.
It’s a Bitcoin fork that gives me an extra 1 million coins. I’ll sell one sat to you for $300.
Also: I’m sending a 12 word seed phrase poem to each member of Congress right before the fork.
https://money.cnn.com/2010/03/02/pf/taxes/rat_out_tax_cheat/
To quote the final paragraph, emphasis mine:
https://www.irs.gov/pub/irs-drop/rr-19-24.pdf
HOLDINGS
(1) A taxpayer does not have gross income under § 61 as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency.
(2) A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.
If currency X is hardforks and there now exist X and X' then in all ordinary cases you have access to both X and X'. But did you receive? Your access is because X' copies/extended X's state when it came into existence. There wasn't any new transfer to you.
One part of the text sounds like it's possible to not "receive": "Situation 1: A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of CryptoN. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A."
Another part of the text describing the same facts, instead makes it sound like reception is determined by resulting control: "Situation 1: A did not receive units of the new cryptocurrency, Crypto N, from the hard fork; therefore, A does not have an accession to wealth and does not have gross income under § 61 as a result of the hard fork."
So, taking both these parts together, it sounds like situation 1 is describing an irrelevant and obvious case. It's technically possible for N to be created and copy currency M but leave out A's coins. Obviously A wouldn't owe any taxes as a result. Duh. This wasn't a case anyone was concerned with.
So what if you instead say okay, the coins you got access to via state copying were "received"-- well okay, but now in that case the many times ethereum or bcash were hardforked and the original systems were largely, but not completely, abandoned you'd then owe income tax on essentially the entirety of your holdings. 0_o
I bought 100 shares of GOOG worth $1000 each, or $100,000 total.
The next day, the stock split and now I own 100 shares of GOOG worth $501 each and 100 shares of GOOGL worth $499 each, or $100,000 total.
Under the stock scenario I don't owe any tax on the new GOOGL shares, but if it was cryptocurrency then suddenly I have to come up with a pile of cash for taxes?
A stock split is when the same underlying asset is revalued due to issuance of new shares. It has the same ticker generally.
For a stock split you would owe no additional taxes due to the split itself.
For a spin off, my understanding is that you owe additional taxes on the extra value obtained from the split. Take the pre spin off market value as the combined asset value then compare it to the added value of the two assets after the spin off. If the post spin off value is more then you are taxed on the realized gain.
Switching assets is taxed normally by sale price and new purchase price.
No taxes were payable on the split, because no new value was created.
The existing value was literally split between the new shares and the existing shares.
https://www.marketwatch.com/story/google-investors-are-about...
If you hold it in a wallet, you have one asset that is dividable into two parts, each transactable on different blockchains. If you hold it on an exchange, you have the right to receive an asset on one blockchain, and after the fork the exchange credits you the right to receive an asset on another blockchain.
These are different events. Arguably, all exchange balances in new blockchains are basically "airdrops" of new economic rights. It's not directly held assets, but rather an abstraction over it, and this abstraction is different. If the exchange wants to, it can refuse to give you airdropped or hardforked assets on "your" crypto.
The guidance seems mostly in line with expectations, but I find one bit confusing. The IRS is drawing a distinction between a hard fork with an airdrop and a hard fork without an airdrop. I don't understand the concept of a hard fork without an airdrop. If the new chain doesn't at least maintain the balances of all existing accounts using the new chain's token, then IMO it's not a fork at all but simply the launch of a new cryptocurrency. Can someone give an example of the kind of hard fork with no airdrop the IRS is talking about?
If you receive the new coins directly, this guidance does not apply to you.
Clarifying the parts that are already clear wasn’t too valuable. Maybe useful for a consumer that thinks “I can trade all day and never pay tax”, but nothing actionable for any accountant.
I'm curious what expectation you feel it met?
I believe it somehow managed to provide absolutely no clarity on any of the difficult questions. And to the extent that one can attempt to apply it literally and conservatively the results are unconscionable (e.g. having to pay income tax many times over on any hardfork-prone cryptocurrency).
The only way that I can see that this met expectations is that those of us that don't own hardfork prone centrally administered assets and diligently sold fork coins ASAP and recording ordinary income for their sale won't be impacted significantly by this. But anyone who didn't do those things is now in a world of confusion.
I agree that the rules are stupid and have bad outcomes in many cases. But I didn't expect IRS guidance to change that. I also agree that the guidance is ambiguous on hard forks (is it an "airdrop" or not?) and that's a big problem.
A market value might well be established in the hours or days after, but it isn't always.
In cases where the newly created cryptocurrency immediately carries the market there is an unambiguous value for the new system (and the original cryptocurrencies value becomes ambiguous), but applying income tax to the new asset there leads to absurd results.
I agree that the ruling seems to generally support some aspects of one of the most obvious conclusions in the simplest of cases, but it fails to meaningfully clarify the application... and also suggests some absurdities that almost no one was expecting.
I would also be comfortable using the first trading day's close as the market value rather than the instantaneous value at fork time which as you say doesn't exist in most cases. Of course the "close" time is arbitrary but as long as you have a consistent methodology for choosing it you should probably be OK.
In any case, it's clear the IRS didn't think hard enough about the consequences of their guidance here. I hope they clarify more but we are probably in for another long wait. Ideally, Congress would do something to make the rules more reasonable.
Agreed, but that appears to contradict the plain text of the ruling.
It's also not guaranteed to be unambiguous. Even with ETH/ETC and BTC vs BCH/BSV there are people that argue the forks are the real thing, though I agree that they're crazy. But it isn't hard to imagine a situation where the split were closer to 50/50 (and maybe both sides got different tickers).
It's also possible for it to look like one won but have the situation reverse... E.g. it's not completely implausible that ETH might have won originally, but then a week in the political winds changed, all the hash power moved to ETC leaving ETH useless and then had the ethereum foundation people say the fork was a mistake, and then everyone followed along with giving the old chain back the ticker.
When BSV split off, there were two chains each incompatible with each other and the original rules didn't continue (in that case). Many exchanges listed two assets, transferring any bcash holdings into each equally, "Bitcoin ABC" and "Bitcoin SV". Other exchanges gave ABC the BCH ticket. I think at least one gave BSV the BCH ticker. Over time the ABC side got the BCH ticker everywhere. I imagine if BSV had succeeded in their effort to get more hash power the situation would still be highly inconsistent.
In some cases cryptocurrencies have made additional consensus rule changes to make sure hardforks couldn't be undone, in some cases they haven't. Their understanding of hardforks seems to assume that all hardforks are bilateral, but in many cases they're actually one sided and could be undone.
I agree that your interpretation should be the one adopted when it is unambiguous.
> I would also be comfortable using the first trading day's close as the market value
I would agree if we were talking about orderly or regulated markets. For example, in many bitcoin forks the fork was not meaningfully tradable for a week or more-- and when it became tradable it was only tradable on obscure foreign exchanges whos terms and conditions forbid US residents from using the service. In these illiquid markets the prices have been rather distorted.
FWIW, the interpretation I adopted was that I've just sold fork quickly as soon as I could reasonably move them to a place to sell them, then reconized as income the value I actually received in selling them. ... at least the forks I knew about, but there have likely been other forks that I've never heard of.
There are also likely coins that I could be argued to technically control but which I don't currently know about-- stuff like coins mined in 2012 which are currently lost in corrupted wallet files (or perhaps with forgotten passwords that I'll eventually crack) on old system images that I'll probably find some day, but which I don't know about right now, even after doing a bit of looking.
Consider: for people actually using Bitcoin rather than speculating in an exchange account-- their bitcoin holdings can look a lot more like USD laying around your house than like your S&P 500 ETF in your brokerage account.
Because of these lost cases I think it would be much more reasonable to state that ordinary income is only realized when you demonstrate actual control over the coins, e.g. by moving them. This would have the effect of allowing people to delay the income tax, but they'd do so only with serious risk of value loss and at the cost of delaying the starting date for a capital gains calculation (so it would fail an equivalents test). This would nicely eliminate a lot of the absurd corner cases, including stuff like the winner flip/flop.
Yup, I did the same. If the IRS audits us we may have to change our calculations but the absolute difference in tax owed should be small.
My understanding is that despite their reputation the IRS is usually fairly chill about this sort of thing if you demonstrate you had good intent. I hope I never have to test that though. Unambiguous guidance sure would be nice!
Q36. I own multiple units of one kind of virtual currency, some of which were acquired at different times and have different basis amounts. If I sell, exchange, or otherwise dispose of some units of that virtual currency, can I choose which units are deemed sold, exchanged, or otherwise disposed of?
A36. Yes. You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.
Q37. How do I identify a specific unit of virtual currency?
A37. You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address. This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.
Note, however, that they also clarify that this is not the default accounting method:
Q38. How do I account for a sale, exchange, or other disposition of units of virtual currency if I do not specifically identify the units?
A38. If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out (FIFO) basis.
You are right you are not taxed (in nominal terms) if your dollar appreciates. That is because payment to the IRS is rendered in dollars, and dollars only. If your dollar increases, well so does the amount you lose when you give that dollar to the IRS.
EDIT: To answer my own question, this FAQ states: "No. If you receive virtual currency as a bona fide gift, you will not recognize income until you sell, exchange, or otherwise dispose of that virtual currency."
Presumably I only have to worry about my lumens if I cash them out or pay someone with them.
If you are the sole possessor of a private key which grants control of a cryptocurrency address then you have complete dominion over the crypto at that address. Under situation 2 of the guidance: "B has dominion and control of Crypto S at the time of the airdrop, when it is recorded on the distributed ledger, because B immediately has the ability to dispose of Crypto S."
Taken in the most taxpayer hostile interpretation that means that if the ledger is duplicated you have income because you have the ability to dispose of the forked coin with your private key even if you have no desire to touch it in any way.
> even if you have no desire to touch it in any way.
Not just desire, in most cases people don't even know about most of the cryptocurrency forks!
As an analogy: if I get paid by check on december 30th, and the check doesn't clear until january 2nd, is the income for the old year, or the new year? What if I hold onto the check, waiting for the new year? How about if I have the check, but I'm snowed in, and can't get to the bank? What if I can get to the bank on december 30th, but the bank is snowed in and closed?
(Answers: old year, old year, and then two don't knows)
The closest thing I can see to a definition is in 26 CFR 1.61-1:
> An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. A hard fork followed by an airdrop results in the distribution of units of the new cryptocurrency to addresses containing the legacy cryptocurrency. However, a hard fork is not always followed by an airdrop.
https://www.irs.gov/pub/irs-drop/rr-19-24.pdf
Consider the Bitcoin/Bitcoin Cash hard fork of 2017. No "distributed ledger addresses" received an airdrop distribution.
What happened instead is that the tokens previously valid on a single network (Bitcoin) became valid on a new network (Bitcoin Cash). There was no "distribution" and as such there was no airdrop according to the IRS definition.
On the first block of the Bitcoin Cash split, there was no "recording" of cryptocurrency receipt on the "distributed ledger." There was just a block containing some unrelated (for most users) Bitcoin Cash transactions.
Either the IRS doesn't understand the basis of a hard fork, or it's specifically singling out hard forks coupled to "airdrops" as having received income.
Likewise Situation 1, from the same document:
> Situation 1: A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A.
> ...
> A did not receive units of the new cryptocurrency, Crypto N, from the hard fork; therefore, A does not have an accession to wealth and does not have gross income under § 61 as a result of the hard fork.
The use of the word "account" is also problematic, as it implies a custodial relationship with a financial institution, which has nothing to do with Bitcoin itself.
Filling in the blanks:
A holds 50 BTC. On Date 1, BTC experiences a hard fork, resulting in the creation of Bitcoin Cash. Bitcoin Cash is not airdropped or otherwise transferred to an account owned or controlled by A.
A did not receive units of the new cryptocurrency, Bitcoin Cash, from the hard fork; therefore A does not have an accession to wealth and does not have gross income under § 61 as a result of the hard fork.
Stay tuned because these rules are going to be refined - a lot.
I am surprised that McDonalds can offer you 50 cents off a burger without having to file a 1099.
A discount is not income. If they gave you a $0.50 gift card though, that's taxable income, and they should collect a W-9, and file a 1099 if the total of annual amounts adds up to $600 or more; as a recipient, you're required to include it in your income regardless of if the originator filed a 1099 or not.
In seriousness, though, how do you build up this level of comfort/familiarity with the tax code? Did you do it professionally?
I read bogleheads forums and tax questions are usually interesting to me. I don't like filing my tax returns without understanding why everything is where it is.
All that said, discounts aren't income comes up in the context of "why aren't cash back credit cards taxable, but account opening bonuses are" which also touches on 1099 rules because people complain about bank X issuing 1099s for all the bonuses, even when they aren't near the reporting limit. A quick search to verify that gift cards count as income (because they're considered cash equivalent) also reminded me of the name of the W-9 form.
What does this mean for crypto players that exchanged a lot of crypto, realized gains, then lost their wallet?
Are they still on the hook for taxes on the gains even though they can't access the wallet anymore?
The crypto industry is stymied, time to move on and let “real” fintech take the reins...
The ruling is basically saying that if your exchange didn't support the fork, you didn't receive any crypto, so there's no taxable income.
But if your exchange did support the fork, you have taxable income once those crypto show up in your exchange account and you can transact with them.
The ruling appears to say nothing like that and nothing that would particularly support that interpretation.
So you would not owe tax until they supported it (if at some point they do). Whether it's theft isn't a matter for the tax agency.
* fair date accounting for when you take custody of a private-key / access to a wallet holding an asset (air dropped, hard forked or traditionally acquired).
* specific identification is allowed for cost basis accounting! Not sure if this is new but this is a massive game changer for me.