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How to Report Crypto Assets Accurately To The IRS

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More On Crypto From The IRS

The IRS is not done with crypto yet.  It has now followed up its recent enforcement letter with more guidance for digital currency owners.

Revenue Ruling 2019-24 On Airdrops And Hard Forks

Airdrop

When a virtual currency distributes tokens to holders free of charge to raise funds.

Hard Fork

When new versions of a blockchain are separated from previous versions, a fork is created in which one path follows the old version while the other route follows the newly upgraded blockchain.

According cointelegraph, in terms of the new rules, not every hard fork has to be treated as an airdrop, although those who received new currencies in a hard fork are considered as having received them in an airdrop, and these should be reported to the IRS as gross income.

If a taxpayer receives a new currency from an airdrop into a wallet that is managed by an exchange that does not support the airdropped currency, the taxpayer does not have to report it as income.

However, as soon as the exchange starts to support the airdropped crypto, the taxpayer is considered to have received the airdrop at that time and becomes liable for tax on it.

The new advice is a bit problematic. With regular crypto, taxable events occur when you sell or exchange your crypto. Now, with this further advice, it seems that the taxable event occurs upon receipt of the crypto as gross income.

 

Frequently Asked Questions

Fair Market Value

Traditionally fair market value (FMV) is the selling price a willing buyer and seller agrees to.  For cryptocurrency, value is determined by the exchange and recorded in US dollar. For peer-to-peer transactions or those not facilitated by an exchange, fair market value is determined by the date and time the transaction was recorded in the blockchain.

The Cost Basis

Cost basis is typically defined as “original value” for tax purposes.  For crypto, the cost basis is what you spent to acquire digital currency, including all fees, brokerage commissions from exchanges, and other acquisition costs in US dollar.

Your adjusted basis is your cost basis increased and decreased by certain expenditures and deductions and credits based on marital status and other similar determinants.

To determine the cost basis, you need to decide which units of currency were sold, exchanged, or disposed of and match the buying costs for every unit sold.

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Calculation Mode

The IRS clarified the preferred method of calculation for cryptocurrency. They advised that the specific identification method should be used.  To do this, you have to identify the exact unspent output Bitcoin transaction (UTXO) you sold out of all the Bitcoin you had, after which you have to calculate your tax liability based on the sale of the actual Bitcoin UTXO.

If you are not using this method yet, you can use the FIFO method (first-in-first-out), which does not take real-time user activity into consideration.

The FIFO method requires you to make a lost of all purchases and a list of all sales.  To match, take the first item in the purchase list and determine the tax results as if you sold it at the same price and on the same date as the first sale in the sales list.  Be careful, though – FIFO results can lead to over-taxation, especially if you bought your first Bitcoins a long time ago.

The specific identification method provides a complete and accurate report.  It is done by tracking individual units of virtual currency but can only be used if select units are identifiable to report crypto-asset movements (addresses; wallets; exchanges; etc.)

Taxpayers can use digital identifiers such as public and private keys and addresses or records that show the transaction information of all units of a specific currency held in a particular account.

Specific identification requires the particular date and time each unit was acquired, as well as the cost basis and the FMV of each unit at the moment of acquisition as well as the date, time and FMV, and sale value or price of each unit when it was sold or disposed of.

cryptocurrency tax

Tax Planning For Cryptocurrency U.S. Investors

Keep Your Documents And Records

IRS codes require that you maintain detailed documentation on receipts, sales, and exchanges to establish the validity of all tax returns.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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