The IRS in the United States has released its first cryptocurrency tax guidance in five years.

The IRS released tax guidance on cryptocurrency airdrops and hard forks on 10/9, the first guidance in five years to calculate taxes on cryptocurrency holdings.

According to the Revenue Ruling 2019-24 issued on 10/9, this guidance addresses common questions for taxpayers and practitioners, and also answers tax questions for investors holding cryptocurrency as a capital asset. IRS Commissioner Chuck Rettig stated:

The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand reporting requirements and take steps to ensure that those who disregard the tax laws are held accountable. Compliance is a priority.

Forks

The guidance resolves a long-standing issue, stating that new cryptocurrencies created from forks of existing blockchains should be treated as ordinary income, equivalent to the fair market value of the cryptocurrency.

In essence, when new cryptocurrency is recorded on the blockchain, if the taxpayer actually controls the tokens and has the ability to use them, there is a tax obligation. The document states:

If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop or some other kind of transfer, you don’t have taxable income.

Essentially, if your cryptocurrency undergoes a hard fork and you do not receive new cryptocurrency, whether through an airdrop or otherwise, you are not obligated to pay taxes.

Lokay Cohen, VP of Bittax, mentioned that the guidance differentiates between hard forks and airdrops, but not every hard fork should be considered an airdrop. Those who acquire new coins through a hard fork are also required to report the assets as total income to the IRS.

Additionally, Jerry Brito, Executive Director of Coin Center, believes that this guidance may lead to more confusion, stating:

While the new guidance provides some much-needed clarity on certain issues related to basis calculation, gains, and losses, I am quite puzzled by the nature of hard forks and airdrops. One unfortunate consequence is that third parties can now create reporting obligations for you by simply forking the network you hold coins on or airdropping unnecessary coins on you.

Cost Basis

The new IRS guidance also provides the long-awaited standards for taxpayers, clarifying how to determine cost basis, such as income from mining or sales of goods and services, or the fair market value of coins.

The cost basis is calculated by aggregating all funds spent to purchase cryptocurrency, including fees, commissions, and other acquisition costs denominated in dollars.

For example, the value of cryptocurrency purchased on an exchange depends on the amount sold by the exchange in dollars. In this case, the basis of income will include commissions, fees, and the cost of purchasing cryptocurrency.

You might wonder if frequent trading of cryptocurrency will result in higher taxes. The new guidance allows for the use of "first in, first out" accounting or specifically identifying which cryptocurrency was purchased when sold.

With regulations gradually entering the cryptocurrency market, corresponding rules are being filled in, providing assurance to the public, and of course, it would be great if more people could access this area.

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