The IRS have issued a new guidance on taxation all type of cryptocurrency. The guidance clearly states out the all the below revenue rulings:
The same rules that applies to equities and bonds also applies to gifting of cryptocurrency. The gifter of the cryptocurrency will attract no tax irrespective of the amount of cryptocurrency gifted out. The receiver of the gift will also not get any income. Instead if the receiver of the gift has a gain, then they take their gifters cost basis in the asset. In a scenario where the cost basis cannot be determined, then it is equivalent to $0.
Note that if the gifted crypto is lesser than the value of the gifters basis, then it can be said that the giftees basis is the lesser of the gifters basis, we can then say there is a fair market value at the time of giving out the gift.
The great news about the new revenue ruling, released by IRS is the FIFO (First in First out) or any other identifications for calculating all cost basis. Arguably the IRS did not include the LIFO (Last in First out) or any other cost basis as an accepted calculation method.
It is strongly advised to get the service of a good tax preparer to help in calculating your tax if you find it confusing to do.
The IRS also allows certain identification as a means of assignment method. A taxpayer may use certain identifications if they are able to provide the digital identifiers, which includes, public key, address, private keys, records showing all the transaction information for any type of crypto held in a single wallet, account or address. you can now use a single identification to optimize all your taxes. Note that if all the assets are not optimal then the FIFO can be used in calculating your tax.
There are majorly two types of tax treatments forks which is the soft and hard forks. Soft forks usually don’t have any consequence on new assets. Hard forks always result in a new coin being airdropped into your account to be treated as an income with the current market value, of when it was received.
A soft fork can only occur when a distributed ledger is being checked through by protocols, and does not lead to creation of a new cryptocurrency or diversion of the ledger.
Some taxpayers are of the opinion that it is very unpleasant when treating incomes as hard forks, as against the wish of the taxpayer. Take for instance all Bitcoin Cash was converted to Bitcoin Satoshi’s Vision due to the hard fork on November 15, 2018. Most taxpayers never wanted to own BSV and they are now compelled to pay ordinary income tax at the value time of the receipt. This can be disastrous when the value of the coin drops drastically after it was received.
The IRS guidance clearly states that you should lookout for the specific exchange for pricing data on any cryptocurrency exchange. A tax expert/preparer can always update you on the latest pricing data exchange.
Perhaps you deal in one on one transactions that does not involve an exchange, the IRS will always accept an evidence of a fair market value, because the price of cryptocurrency is determined by the block chain world market.
All taxpayers are obligated by the Internal Revenue Code and regulations to maintain a good record, so as to determine their positions on tax returns. You should also take records of all sales, exchanges, receipts and all other dispositions involving cryptocurrency.
If you don’t know how to do a good documenting and recording, you can seek the service of a tax consultant/expert.
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