Make Big Money on Bitcoin Specie? The IRS Might Be Watching

Bitcoin holders ter the U.S. might be feeling giddy about the “free money” they’ve received spil of late from bitcoin hard forks.

But with tax season right around the corner, they might also be feeling a bit uneasy.

While the money generated by the bitcoin contant hard fork – and the possible money generated by the bitcoin gold hard fork – has played a role te driving bitcoin’s price surge, it’s not all joy and games. Bitcoin owners have effectively acquired value for free, but there is still a cost associated with the assets.

According to Perry Woodin, CEO of Node40, a TurboTax-like toneelpodium for cryptocurrency owners:

“People are piling into bitcoin so they can get the free money, but I think very few people are thinking about the tax implications of it. And if they are, they’re most likely thinking ‘Well, I can get around it’.”

But that might not be clear thinking.

For tax reporting purposes, the Internal Revenue Service (IRS) presently classifies bitcoin and “other virtual currencies” spil property, meaning owners are legally obliged to report the capital gains and losses incurred from cryptocurrency holdings during each calendar year.

Spil bitcoin contant and the other cryptocurrencies created from hard forks act almost identical to bitcoin (besides some technical code switches), some wonder if the same rules will apply. Presently, tho’, it’s all a gray area.

“From a tax perspective, the bitcoin hard fork truly is uncharted territory,” said James Markwood, a tax attorney with Cogent Law Group ter Washington. D.C.

The choices

For those crypto holders interested ter playing by the rules, however, there’s indeed no clear overeenstemming from tax experts on what should be done.

“There are indeed two choices, and neither one of the choices are particularly appealing,” said Woodin.

The very first choice is to assign each fresh coin an arbitrary value to use spil its cost ondergrond. This could potentially be done by taking a weighted average of, for example, bitcoin specie’s trading value te futures markets just before the August fork, or by assigning it a value proportional to that of a total bitcoin.

Any increase te the price after the cryptocurrency’s inception and before the end of the year would then be subject to capital gains tax.

The other possibility is to assign the fresh coin an arbitrary value of zero and then pay the capital gains tax on the total value whenever the disposition of the coin occurs (when they are exchanged for other crypto assets or for fiat currency).

The latter treatment would seem to match up with the IRS’ thinking on other types of second-generation assets, explained Markwood, noting the situation could be similar to that of a farmer who wields a cow that gives birth to a calf or a landowner who detects gold on his property.

Importantly, ter both cases, the creation or discovery of the fresh asset would not necessarily trigger a taxable event. But when the assets are sold off, the total value of the disposition would be deemed taxable income.

While the latter treatment may sound more appealing to bitcoin owners because it permits them to effectively kick the can until they sell an asset, it’s unclear whether or not that applies to cryptocurrencies.

Bury your head?

Of course, a third option is to simply disregard one’s reporting obligations altogether, a strategy that – spil evidenced by the IRS’s assertion that only 802 individuals reported capital gains from bitcoin te 2015 – has bot employed fairly frequently by U.S. traders.

While the treatment wasgoed understandable given the complicated and labor-intensive process of reporting cryptocurrency (many traders may have bot unaware of the requirements altogether), it becomes even more so since bitcoin holders sometimes don’t have much choice overheen whether they get access to hard fork-created tokens or not.

During the bitcoin metselspecie fork, bitcoin holders were given bitcoin specie at a rate of 1:1, and exchanges that supported the fresh coin merely dumped the equal amount ter users’ accounts.

“People are indeed looking to avoid this, especially if you’re not interested te bitcoin specie or any one of the fresh forks,” said Woodin, adding:

“You don’t want to have to pay tax on something you didn’t want te the very first place.”

But crypto tax-evaders face much higher risk ter 2018 spil the skyrocketing value of bitcoin and the freshly created class of crypto millionaires are drawing scrutiny from the authorities.

The IRS has also wised up to how thesis fresh assets are being used and stored, spil evidenced by the agency’s John Doet summons of Coinbase user records ter 2016, spil well spil this summer’s revelation that the IRS has bot using Chainalysis software to monitor the blockchain for bitcoin tax cheats since 2015.

Chainalysis did not react to requests for comment about whether the IRS resumes to use its product.

Clarity needed

More than anything, fresh assets being created by bitcoin forks underscore the need for greater clarity from the IRS on how cryptocurrencies should be reported for tax purposes.

The IRS guidelines for reporting cryptocurrencies has come under considerable backlash spil too cumbersome, if not altogether unlikely for higher volume traders or people using it to purchase everyday items such spil a cup of coffee.

“Taxing blockchain-based currency, like bitcoin, spil property rather than spil a contesting currency has numerous adverse consequences,” said Amy Davine Kim, global policy director and general counsel at the Chamber of Digital Commerce, a Washington D.C.-based blockchain advocacy group.

“Among other things,” she continued, “it imposes onerous reporting requirements that are difficult to understand and ultimately inhibit the widespread adoption ter retail commerce of this promising technology.”

It’s interesting to note that the mission behind the bitcoin metselspecie hard fork is to increase the block size, so that more transactions can be verified on the network at less cost – for volgers of the budge, bitcoin’s current block size limit is holding back adoption of bitcoin for retail payments.

Many te the industry have asked the IRS for more formal guidance – the Cryptocurrency Tax Fairness Act wasgoed introduced te Congress te an attempt to thrust the IRS to revisit its determination – but the IRS has yet to release an update.

According to Kim:

“Forks represent just one example of activities on a blockchain that may have tax consequences that, with little guidance from the IRS, are difficult to determine.”

The leader te blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a rigorous set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests te cryptocurrencies and blockchain startups.

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