New IRS Policy on Crypto Clears the Air Though Left Some Issues Wide Open
The tax-related cryptocurrency policy has been eagerly awaited in the United States of America for a long time. Finally, on October 9, the guidelines related to cryptocurrency taxation have been updated by the federal department, the Internal Revenue Service. All the contentious issues related to cryptocurrency taxation, such as how the tax liability related to the income generated by hard forks and airdrops will be treated or whether cryptocurrency donated in charity is subjected to tax has been addressed. The new guidelines also provide details about the tax liability arising out of cryptocurrency sales.
Hard Forks and Airdrops
Both events related to hard forks and airdrops need to be reported by investors to the tax authorities. It is even though both of these events may occur without the consent of the cryptocurrency holders. IRS considers the additional gains from these events as part of the taxable income and has gone ahead with the taxing these incomes. Fortunately, the event of a soft fork is not considered taxable by the IRS as this event doesn’t result in the creation of any new cryptocurrency. It means digital coin holders earn no additional revenue, and hence, there is no need to report or tax the soft fork event.
Cryptocurrency for Buying and Selling
If a cryptocurrency holder uses the digital coin to buy any product or service in the market, the transaction will be liable for the taxation depending upon the fair value and cost aspects of consideration. Similarly, any income generated by the cryptocurrency will tax according to the rules and regulations set by the authorities.
If you have received the cryptocurrency as a gift, you will not be liable for the tax. Similarly, cryptocurrency donations are not subjected to the tax liability, but if the digital asset remains with the holder for more than one year, then it will be liable to the deduction. The tax will calculate by considering the fair value of the cryptocurrency at the time when the donation was being made. If the value of cryptocurrency assets appreciates, but these assets are donated to the charity, no capital gain tax will apply to assets.
The new guidelines related to taxation of cryptocurrency have certainly brought clarity among digital coin holders. However, it has also left some gaps that could exploit in the future. For example, it is not hard for any individual to create his/her token and then create a heavy tax liability for the holder by creating an event such as an airdrop. If that results in income generation for coin holders, then they have to report the event to tax authorities.