The IRS recently issued new cryptocurrency guidance and if you bought or sold cryptocurrency and didn’t report it on your tax return, they are on the look for you.
Cryptocurrency
Cryptocurrency is a capital asset (provided you aren’t a trader). Therefore,
- you pay tax on any gain at reduced rates, and
- losses are subject to capital loss limitation rules.
Fork
In the cryptocurrency world, a fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of forks:
- one in which you don’t get cryptocurrency, and
- one in which you get new cryptocurrency.
The IRS ruled that
- a fork in which you don’t get cryptocurrency is not a taxable event, and
- a fork in which you get new cryptocurrency is a taxable event and you’ll recognize ordinary income equal to the fair market value of the new cryptocurrency received.
Example: You own J, a cryptocurrency. A fork occurs and you receive three units of K, a new cryptocurrency. At the time of the fork, K has a value of $20 per unit. You’ll recognize $60 of ordinary income due to the fork.
Crypto Taxation:
Here is the tax basics. You will want to treat cryptocurrency as property for tax purposes:
- If you receive bitcoin in exchange for your services, then your income is the fair market value of the bitcoin received. Your basis in the bitcoin received is its fair market value at the time of receipt plus any transaction fees incurred.
- If you receive bitcoin in exchange for your property, then your gain or loss is the fair market value of the bitcoin received less the adjusted basis of your property given up. Your basis in the bitcoin is its fair market value at the time of receipt plus any transaction fees incurred.
- If you give bitcoin in exchange for services, then the value of the expense is the fair market value of the bitcoin given. Also, the value of the services received less the adjusted basis of the bitcoin is a gain or loss to you.
- If you give bitcoin in exchange for someone’s property, then your gain or loss is the fair market value of the property you received less the adjusted basis of your bitcoin.
If you would like help with your cryptocurrency and or questions regarding crypto, please don’t hesitate to call our office.