Cryptocurrency News

IRS working on a new crypto tax guidance

The IRS is working on new guidance for cryptocurrency investors. The Internal Revenue Service (IRS) has not updated the IRS notice since 2014, and last month the tax collector has announced that they are finally making some changes.

On May 16th, Charles P. Rettig from the Department of Treasury announced that they will be providing new guidance for taxpayers, specifying that “virtual currency as a medium of exchange and investment has continued to develop and taxpayers deserve clarity on basic issues related to the taxation”.

Every April, taxpayers need to report its virtual currency transactions to the IRS, if they fail to register them properly, penalties and interest will be severely imposed.  Unfortunately, many investors find hard to understand the reporting process while many others have found a way to avoid being tracked. To solve both issues, the Internal Revenue Service is going to release new parameters to address those questions and further topics that have not been covered so far, such as airdrops and overseas funds in crypto.

In the last two years, the necessity of more clarity in Bitcoin taxation has been evident. Income from airdrops and the exercise of hard forks were not fully covered in the last framework, as well as the method for determining the market value of the cryptocurrency received. Therefore, the IRS is looking forward to disclosing a more concrete scheme to define the cost basis.

In the section A-5 of the Notice 2014-21 the IRS stated the following:

“Taxpayers will be required to determine the fair market value of the virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars at the exchange rate, in a reasonable manner that is consistently applied”

Based on the previous fragment of the 2014 Guidance, many questions have arisen about how to manage the different pricing methodology used by exchanges, which each of them using widely different pricing procedures.

On the other hand, many institutional investors have decided to make use of their Proof-of-Stake while others such as Coinbase are now offering staking-as-service. Those two events have activated the IRS alert on whether staking should be taxed as ordinary income (taking into account mining is).

Regarding US investors holding cryptos overseas, IRS may be giving more clarity on how to report them in accordance with the Foreign Account Tax Compliance Act (FATCA). Based on the FATCA, every United States citizen should report accounts worth over $50K. Taking this in mind, many experts consider that the tax collector will start to include in their framework the cash in non-American wallets as well as ask for a register of buying and selling activities in overseas exchanges.

Until now, American crypto investors have found difficult to report their incomes, fortunately, next April the process will be a lot simpler and better defined.

Image licensed via Shutterstock

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