Death and taxes may technically be the only constants in life, but even taxes can see numerous changes in a short period of time. Such has proven the case with cryptocurrency taxes, which bring new complications to an already confusing process. Previously, crypto miners and traders were forced to muddle through the process in hopes of not running into trouble with the IRS. Now, however, the agency has issued guidance to clear up the confusion still surrounding crypto taxes. Below, we highlight a few of the main takeaways from this important IRS update:
The latest guidance from the IRS clarifies long-standing questions surrounding forks, which may make new and old chains incompatible. According to the new guidance, altered cryptocurrencies resulting from forks should be regarded as “ordinary income equal to the fair market value of the new cryptocurrency when it is received.” If a hard fork does not result in new cryptocurrency, it will also not result in taxable income.
Fair Market Value
Crypto enthusiasts have long struggled to determine how the cost basis or fair market value should be determined — especially as crypto investments may be acquired in multiple transactions that take place over the course of several years. According to the IRS, however, value is determined based on how much a given exchange sells the cryptocurrency for in U.S. dollars. Coins sold or disposed of can be identified via private keys, public keys, or with detailed records highlighting transaction information.
The new IRS guidance clears up several questions that have long confused cryptocurrency enthusiasts. That being said, this update doesn’t address every source of confusion. As such, it is as important as ever to work with an expert who understands the true nature of cryptocurrency taxation. When in doubt, look to the Highland Tax Group for guidance. Contact us today to learn more.