IRS issues guidelines on “Hard-Forks” (division) of cryptocurrency. Let’s find out all about the new cryptocurrency taxation
A cryptocurrency hard fork occurs when the blockchain on which cryptocurrency transactions are recorded splits permanently. The holder of the cryptocurrency generally has no control over nor does he realize that the “hard fork” (split) is about to occur. The result is two separate blockchains with two separate sets of rules for recording transactions.
Bitcoin underwent a “hard-fork” on August 1, 2017 and resulted in two separate sets of protocols for Bitcoin, as well as a new cryptocurrency called Bitcoin Cash. The result of this hard fork was that people who hold Bitcoin in a distributed ledger now held one unit of Bitcoin Cash for every unit of Bitcoin previously held.
Taxation of dividing cryptocurrencies
On April 9, 2021, the Internal Revenue Service (IRS) released a memo from the Chief Counsel Advice (Hard Fork CCA), detailing the potential tax consequences for taxpayers who held Bitcoin prior to August 1, 2017. ‘Hard Fork CCA regarding the taxation of a particular cryptocurrency transaction, has additional significance because it adds to the limited guidance available regarding proper cryptocurrency taxation more generally.
The Hard Fork CCA came to two conclusions regarding Bitcoin’s “hard-fork”. First, it determined that a taxpayer who received Bitcoin Cash due to the hard fork has a gross income under section 61 of the Internal Revenue Code (IRC).
Second, it ruled that the date of receipt and the fair market value of the income depend on when the taxpayer gains dominance and control over Bitcoin Cash.
These sources define gross income as “all income from any derivative source” and require that all clearly realized gains or undeniable access to wealth over which a taxpayer has complete dominion are included in gross income. domination over Bitcoin Cash when they have the ability to sell, transfer or trade Bitcoin Cash.
Despite the fact that the Hard Fork CCA specifically addresses the consequences of the Bitcoin hard fork, the IRS’s lack of guidance on cryptocurrency taxation means that the Hard Fork CCA is likely to have broad significance for investing taxpayers. in other cryptocurrencies and similar digital assets. Most taxpayers hold cryptocurrencies through a cryptocurrency exchange platform.
IRS and Cryptovalute
Since at least 2014, when the 2014-21 IRS Notice was published, the IRS has taken the position that the cryptocurrency, or virtual currency, is treated as property for federal income tax purposes and that the long-standing principles that apply transactions involving property apply to cryptocurrencies.
So not only dividing digital currencies but any cryptocurrency can be subject to tax. Even new coins, such as those of Bitcoin Prime or newly created ones, could be taxable even if they come from other countries.
The lack of guidance regarding the tax treatment of cryptocurrency has led to questions and debates as to which type of cryptocurrency ownership is most similar and which principles should be used in evaluating particular types of cryptocurrency transactions.
The Hard Fork CCA appears to consider the value of cryptocurrency primarily in its use as a medium of exchange. The Bitcoin hard fork rating contrasts to some extent with a previous IRS guideline related to unsolicited commodity (especially books).
The distinctions between books and cryptocurrencies are numerous, however, the seemingly distinct tax treatment underscores the need for further guidance in the developing area of cryptocurrency taxation. This guide will require a clear and consistent articulation of the nature of cryptocurrency.
Conclusion
Despite its growing popularity and constant media attention, cryptocurrency taxation guidelines are developing very slowly. If you are investing or considering investing in cryptocurrencies, you should consider and prepare for their tax consequences.
For example, if your cryptocurrency undergoes a hard fork, the IRS appears to believe that you have a chargeable event (and you owe federal income tax) on the value of the new cryptocurrency created by the hard fork. Failure to report income could result in penalties and interest. If the IRS can prove that you did not report the income on purpose, you could face criminal penalties. With careful and deliberate planning and advice, you can avoid some of the pitfalls that have affected thousands of cryptocurrency investors.