An Update on Cryptocurrency and the IRS

Readers of this blog may remember a post from about two months ago titled “Cryptocurrency and the IRS” (https://www.taxplanning.com/single-post/2019/09/12/Cryptocurrency-and-the-IRS). The IRS must be paying attention, because they recently released some guidance and frequently asked questions (FAQs) on cryptocurrency. Under the guidelines, a taxpayer does not have gross income from a “hard fork” of the taxpayer’s cryptocurrency if the taxpayer does not receive units of a new cryptocurrency. Also, a taxpayer has ordinary income as the result of an “airdrop” of a new currency following a hard fork if the tax payer receives units of the new cryptocurrency.

A hard fork is a radical change to a network's protocol that makes previously invalid blocks and transactions valid, or vice-versa. An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. If the taxpayer did not receive units of new cryptocurrency from a hard fork, there is no accession to wealth and therefore no gross income as a result of the hard fork. Conversely, if new units are received then the tax payer has ordinary income in the year in which the taxpayer receives the new currency.

A draft form has been released of the 2019 Form 1040, Schedule 1. The form includes a question of “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” If the taxpayer answers in the affirmative, then they must use Form 8949 to figure the capital gain or loss and report it on Schedule D.

If you’re confused about how cryptocurrency should be claimed on your taxes, the professionals at The Center for Financial Legal and Tax Planning are more than equipped to answer any questions with regards to cryptocurrency taxation and would be happy to help.