Posted 3 years ago | by Ben Armstrong
The latest guidance from the IRS on cryptocurrency hard forks attempts to clarify long-standing demands from the industry.
Today, the Internal Revenue Service released the long awaited tax guidance on hard forks for cryptocurrency assets. The new guidance states that a hard fork is taxable, only if the forked cryptocurrency is received by a holder. A hard fork is not taxable if a fork occurs but crypto wallets for the holders of the original cryptocurrency are not credited with new coins.
Obviously, this may become complicated. The very nature of the technological mechanics of cryptocurrency automatically means that the IRS’ attempt for clarity is really more confusion, eliciting more questions than answers.
To muddy the waters further, the cost basis for calculation of tax liabilities is the coin’s “fair market value” at the time it was received. This condition alone is enough to cause anxiety at tax season, much less the other issues that these guidelines have raised.
The IRS Will Create New Challenges
Legal experts within the cryptocurrency industry have focused on two initially problematic aspects of the guidance. The first issue is the IRS’s seeming misunderstanding concerning the definitions for airdrops and hard forks.
The IRS conflates both definitions, assuming that hard forks are achieved through airdrops or distribution by exchanges. The conflation in definitions results in several possibilities, which has played out in a somewhat humorous fashion on Twitter.
However, the conceptual difference is significant, especially within the context of taxes, as both money and outside forces beyond control are involved.
According to the legal assessment in the Washington DC crypto advocacy firm, Coin Center:
“Anytime someone airdrops a coin to an address over which you have dominion and control, they will create a tax-reporting obligation on your part.”
A Question of Understanding
The second issue, which is related to the first, is misunderstanding of the manner of receiving cryptocurrency and its subsequent ownership.
Non-custodial wallets give crypto owners access to private keys, and they can exercise discretion over receipt of forked cryptocurrencies. But the IRS guidance presumes receiving crypto only through third-party exchanges.
The agency’s assumptions (or rather misunderstandings) could have far-reaching consequences for the evolution of cryptocurrency. The lack of clarity could influence taxpayers to hold on to their coins at exchanges, simply due to tax liability concerns. However, there does appear to be room for future revisions, but not anytime soon, since the new guidelines took the IRS a mere five years to develop.