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IRS issues guidance on reporting virtual currency gains

On Behalf of | Oct 23, 2019 | Tax Law |

The IRS has been increasingly interested in tax compliance by those who receive income in virtual or cryptocurrencies. According to the agency, income from investments in these currencies are taxed at the appropriate capital gains rate.

That’s going to require a lot of paperwork for a virtual currency. In order to calculate the capital gain, you need to know your basis, or what you paid for the investment in the first place. The taxable income is the difference between the basis for a particular investment and the amount you sold that investment for. To be fully compliant, you should be able to produce a basis number for every virtual coin you own.

As we mentioned before on this blog, the IRS has been sending letters to people it believes may owe taxes on their convertible virtual currency, or CVCs. The agency is apparently basing that belief on third-party data about virtual currency sales.

Now, the IRS has issued a tax ruling and an FAQ on CVC taxation. This is the first official guidance from the agency since 2014, when it clarified that CVCs are not taxed as currency but as property.

A few tips on CVC taxation

Timing matters. Just like with other capital gains, the time you hold a CVC affects its taxation. Holding them for less than a year means they’ll be taxed at the short-term capital gains rate, which is the same as your ordinary income tax rate. CVCs held for a year or longer are taxed at a preferential rate of 23.8%.

You need to document wallet-to-wallet transfers. Even though the transfer of CVCs between two accounts may be non-taxable, you will still need to document the transaction for the IRS.

Hard fork coin splits with ‘air drop’ distribution are taxable. This can be frustrating because you can be given new reporting responsibilities when someone else makes the decision to split a CVC. However, the IRS has made clear that a “hard fork” coin split where new coins are distributed via air drop is a taxable event. Treat it as if the older coins were sold and new ones bought.

If you’re not certain how to account for your virtual currency investments and comply with the tax laws, you’re not alone. It’s not advisable to guess, so contact your tax attorney for answers.

We insist that your taxpayer rights are protected and your options are known.

Our services are confidential and are protected under the attorney-client privilege as allowed by law.