The Internal Revenue Service (IRS) in May 2019 revealed that it will be issuing clearer guidance pertaining to the tax treatment of Bitcoin and other cryptocurrencies. While the guidance is yet to be released, a lot can be expected such as an outline of how airdrops, forks, staking, and crypto assets stored on international exchanges are taxed, according to Coindesk’s report on June 7, 2019.
Per the report, the cryptocurrency community has been hammering on the IRS’ need to explicitly define how cryptocurrencies are taxed in America. To that effect, Charles P. Rettig, the IRS Commissioner revealed that the tax agency has made plans to issue clearer guidance. The latter will focus on areas it had previously not covered such as airdrops, forks, staking, assets stored on international digital currency exchanges, and how to value cryptocurrency received as income.
Prior to this time, the IRS’ original guidance which was published in 2014 classified cryptocurrencies (for tax purposes) as a property and not a currency, and as such, they are a taxable event. Being the guidance that is still in use, it requires taxpayers to file every transaction that is carried out using a cryptocurrency.
However, there are a lot of uncertainties in its guidance which led to a group of U.S. bureaucrats’ formal letter to the IRS in September 2018 in a bid to get clarification as to how these assets are treated. Moreover, cryptocurrencies have become more complex from what they were in time past.
To that effect, a number of authors and institutions have made suggestions as to how these assets may be treated if the new guidance is issued. One of such is how to determine the fair market value of crypto assets received as income. 2014’s guidance had outlined that if the virtual asset is listed on an exchange, then the fair value is calculated by converting the coin to its equivalent in U.S. dollar using the exchange’s rate “in a reasonable manner that is consistently applied.”
Nonetheless, the price of crypto assets vary from one exchange to the other, a point Phillips, the author of “The Ultimate Bitcoin Business Guide” also noted. According to the author, “every exchange can have its own pricing methodology, and if you’re using ten different exchanges there will be ten different pricing models.”
For this reason, the American Institute of Certified Public Accountants (AICPA) has made a suggestion that may enable people to calculate the value of their crypto asset. It believes it could work if they use the average price of different exchanges, the average rate of the day and also relying on aggregating indexes.
In the case of a fork which involves receiving a cryptocurrency when you hold another, Foust’s report has outlined that there should be no tax effect if people do not carry out actions that will allow them to receive the new coin. On the contrary, if they take measures that will enable them to accept it and they also spend the asset, then it should be taxed at the point of sale.
Similarly, Foust has suggested that if a cryptocurrency is stored on a custodial exchange, then the user should not be liable for the actions of the exchange regarding forks and airdrops. Rather, if the taxpayer had influenced the exchange’s decision in enabling them to obtain the assets, then it calls for taxation.
Another aspect that will be focused on, is staking which AICPA’s memo suggests that it should be handled as ordinary income just like mining. According to the institute, these activities use a similar way to bring taxpayers new crypto assets.
Despite these suggestions, it is still uncertain when the new guidance will be published since the IRS commissioner only hinted that it will be “soon.” It is believed that it might come before October 15, 2019, which is the extended due date for individual returns and September 15, 2019, the extended deadline for pass-through businesses.