by sunils34 on 10/9/19, 6:15 PM with 142 comments
by lacker on 10/9/19, 7:35 PM
It seems like this will incentivize people to sell off new tokens immediately, in order to pay the taxes they incurred during the fork.
To me it seems very unintuitive to tax a hard fork. It is like taxing a stock split. Your asset hasn't really changed, it is just now represented in a different way.
Another weird thing about these taxes is that they assume that one of the forks is the "real asset" and the other fork is the "new asset". In practice, it seems like a lot of times a fork happens along with a lot of argument about which side of the fork is the "real" one.
Well, I guess the IRS does not see cryptocurrency the same way as my intuition would.
by kauffj on 10/9/19, 7:23 PM
It’s a Bitcoin fork that gives me an extra 1 million coins. I’ll sell one sat to you for $300.
Also: I’m sending a 12 word seed phrase poem to each member of Congress right before the fork.
by floatingatoll on 10/9/19, 7:24 PM
To quote the final paragraph, emphasis mine:
https://www.irs.gov/pub/irs-drop/rr-19-24.pdf
HOLDINGS
(1) A taxpayer does not have gross income under § 61 as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency.
(2) A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.
by modeless on 10/9/19, 7:00 PM
The guidance seems mostly in line with expectations, but I find one bit confusing. The IRS is drawing a distinction between a hard fork with an airdrop and a hard fork without an airdrop. I don't understand the concept of a hard fork without an airdrop. If the new chain doesn't at least maintain the balances of all existing accounts using the new chain's token, then IMO it's not a fork at all but simply the launch of a new cryptocurrency. Can someone give an example of the kind of hard fork with no airdrop the IRS is talking about?
by zjs on 10/10/19, 3:58 AM
Q36. I own multiple units of one kind of virtual currency, some of which were acquired at different times and have different basis amounts. If I sell, exchange, or otherwise dispose of some units of that virtual currency, can I choose which units are deemed sold, exchanged, or otherwise disposed of?
A36. Yes. You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.
Q37. How do I identify a specific unit of virtual currency?
A37. You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address. This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.
Note, however, that they also clarify that this is not the default accounting method:
Q38. How do I account for a sale, exchange, or other disposition of units of virtual currency if I do not specifically identify the units?
A38. If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out (FIFO) basis.
by cft on 10/9/19, 7:19 PM
by ocdtrekkie on 10/9/19, 9:01 PM
EDIT: To answer my own question, this FAQ states: "No. If you receive virtual currency as a bona fide gift, you will not recognize income until you sell, exchange, or otherwise dispose of that virtual currency."
Presumably I only have to worry about my lumens if I cash them out or pay someone with them.
by shiado on 10/9/19, 8:24 PM
by aazaa on 10/9/19, 7:34 PM
The closest thing I can see to a definition is in 26 CFR 1.61-1:
> An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. A hard fork followed by an airdrop results in the distribution of units of the new cryptocurrency to addresses containing the legacy cryptocurrency. However, a hard fork is not always followed by an airdrop.
https://www.irs.gov/pub/irs-drop/rr-19-24.pdf
Consider the Bitcoin/Bitcoin Cash hard fork of 2017. No "distributed ledger addresses" received an airdrop distribution.
What happened instead is that the tokens previously valid on a single network (Bitcoin) became valid on a new network (Bitcoin Cash). There was no "distribution" and as such there was no airdrop according to the IRS definition.
On the first block of the Bitcoin Cash split, there was no "recording" of cryptocurrency receipt on the "distributed ledger." There was just a block containing some unrelated (for most users) Bitcoin Cash transactions.
Either the IRS doesn't understand the basis of a hard fork, or it's specifically singling out hard forks coupled to "airdrops" as having received income.
Likewise Situation 1, from the same document:
> Situation 1: A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A.
> ...
> A did not receive units of the new cryptocurrency, Crypto N, from the hard fork; therefore, A does not have an accession to wealth and does not have gross income under § 61 as a result of the hard fork.
The use of the word "account" is also problematic, as it implies a custodial relationship with a financial institution, which has nothing to do with Bitcoin itself.
Filling in the blanks:
A holds 50 BTC. On Date 1, BTC experiences a hard fork, resulting in the creation of Bitcoin Cash. Bitcoin Cash is not airdropped or otherwise transferred to an account owned or controlled by A.
A did not receive units of the new cryptocurrency, Bitcoin Cash, from the hard fork; therefore A does not have an accession to wealth and does not have gross income under § 61 as a result of the hard fork.
Stay tuned because these rules are going to be refined - a lot.
by nsfyn55 on 10/9/19, 7:11 PM
What does this mean for crypto players that exchanged a lot of crypto, realized gains, then lost their wallet?
Are they still on the hook for taxes on the gains even though they can't access the wallet anymore?
by chanfest22 on 10/9/19, 8:29 PM
by algaeontoast on 10/10/19, 2:55 AM
The crypto industry is stymied, time to move on and let “real” fintech take the reins...
by jerkstate on 10/9/19, 6:50 PM
by wiidude32 on 10/10/19, 8:57 AM
by aesthethiccs on 10/10/19, 2:30 AM
by flippinburgers on 10/10/19, 5:25 AM
by revel on 10/9/19, 9:37 PM
* fair date accounting for when you take custody of a private-key / access to a wallet holding an asset (air dropped, hard forked or traditionally acquired).
* specific identification is allowed for cost basis accounting! Not sure if this is new but this is a massive game changer for me.
by hillmorgan77 on 10/11/19, 1:17 AM
by rwmurrayVT on 10/9/19, 6:47 PM