IRS Sets Out Confusing Guidelines for Crypto Taxation

The taxman presented a case for going after income from hard forks, creating confusion on social media as dozens of forked coins may turn out to be taxable.

For US-based crypto owners, the IRS set out its updated guidelines on crypto taxation. The taxman riled up social media, after setting out guidelines that counted coins from a hard fork as income.

The IRS set out the usual rules for counting tax gains or losses when an actual sale occurs. For that reason, it is highly confusing that coins received in a hard fork, even if not sold, would be counted as income. The IRS did spell out that only coins that are controllable should be taxable. But the crypto community was still confused about the taxable value of forked coins.

https://twitter.com/NeerajKA/status/1181993291887386624

The IRS suggested that tax is owed only when a user is in control of the coins, which means they have split their coins in a new wallet. But there are multiple forks where the coins were never claimed. The hypothetical situation where forks are artificially created to force taxes on people is also discussed on social media.

https://twitter.com/lopp/status/1181976686897848320

The IRS itself seems to have chosen a confusing definition for a hard fork, suggesting that the coins are airdropped, instead of generated on a different blockchain:

“A hard fork followed by an airdrop results in the distribution of units of the new cryptocurrency to addresses containing the legacy cryptocurrency.”

What is worse, the IRS takes as a basis the price at the hard fork, which is accounted as income during the calendar year. This further confused crypto owners, as the price of some assets has fallen by 90% from their initial launch.

Additionally, the IRS suggested that tax may be owed for crypto payments, even when the asset used has no specific market value. In that case, the IRS taxes the fair market value of the goods or services sold.

On the other hand, the IRS has a loophole for gifts in crypto assets, which are not taxable until the asset is sold. At this point, the rules are even more confusing, as there is nothing on the distributed ledger that could distinguish a payment from a gift.

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