The Internal Revenue Service just issued more guidance on the taxation of cryptocurrencies. The guidance comes in the form of Revenue Ruling 2019-24 and a set of FAQs. Officially, the guidance applies only to Federal income taxes. However, states are likely to follow the IRS rules.
Revenue Ruling 2019-24 is about hard forks in a distributed ledger. The IRS concludes that the hard fork is not itself a taxable event – that is, if you hold a cryptocurrency immediately before a hard fork and still hold it immediately after, the hard fork has no tax consequences. On the other hand, if you receive an air drop of the new cryptocurrency following the hard fork, you’re taxed on the value of the air drop.
Otherwise, there are no surprises in the new guidance. Thus:
- Cryptocurrency is treated for Federal income tax purposes just like any other property, a diamond or a rusty 1964 Chevrolet. Cryptocurrency is not treated like U.S. dollars in any sense.
- If you receive cryptocurrency in exchange for something else, whether property or services, you’re treated as having received a payment equal to the value of the cryptocurrency at the time you received it. If the bitcoin was worth $3,000 at the time you received it, you received a payment of $3,000 for each bitcoin you received, even if the bitcoin was worth $500 the month before or $10,000 the month afterward.
- When you dispose of cryptocurrency, you have gain or loss based on the difference between the amount you paid for the cryptocurrency – your tax “basis” – and the amount you received for it, just as if you were selling the 1964 Chevy.
- In general, you have capital gain or loss from selling cryptocurrency. But if you’re in the business of trading cryptocurrency the cryptocurrency will be treated as “inventory” and you’ll have ordinary income or loss.
- Cryptocurrency received for services is treated as income for purposes of self-employment taxes as well as for purposes of income taxes.
- Most people would guess that receiving cryptocurrency is taxable, g., my employer paid me $5,000 of ether, so I’m taxed on $5,000 of income. Less obvious is that you’re subject to tax when you pay someone with cryptocurrency. For example, if you’re the employer and pay your employee $5,000 of ether, you have engaged in a taxable sale of your ether, as if you had sold the ether for $5,000 and then turned around given $5,000 of cash to your employee.
- If you trade one cryptocurrency for another, it’s a taxable sale. There is no such thing as a tax-free exchange of cryptocurrency, as there is for real estate.
- If you own a bunch of bitcoin and want to use some to buy a house, you can choose which of your bitcoin to use (presumably the bitcoin with the highest tax basis).
- If you receive cryptocurrency as a gift, it’s not taxable. Caution: there is no such thing as a business “gift.”
- You can make a charitable contribution using cryptocurrency. If you’ve held the cryptocurrency for more than a year, your deduction is generally equal to the value of the cryptocurrency. Otherwise, your deduction is the lesser of the value of the cryptocurrency or your tax basis.
- If you contribute cryptocurrency to an LLC or partnership, it’s not taxable at the time of the contribution. But when the LLC later disposes of the cryptocurrency, you will be taxed on any gain that was “built in” to the cryptocurrency at the time you contributed it.
- If you own multiple crypto wallets, you can transfer among them without tax consequences.
Questions? Let me know.