financial gains

New IRS Guidance on Cryptocurrency Provides Clarity but Questions Remain

The New Jersey Society of Certified Public Accountants (NJCPA) reminds taxpayers that the Internal Revenue Service’s newly released two-part guidance on the tax treatment of virtual currency — such as Bitcoin, Litecoin and Libra — helps to clarify many issues relating to accounting, financial reporting and distribution. However, questions still remain over addressing noncompliance as well as whether or not the IRS will differentiate hard forks (blockchain nodes that no longer accept the newest version of the blockchain and diverge from the existing distributed ledger) from airdrops (means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers). Soft forks do not generate a taxable event due to the lack of new cryptocurrency creation.

In its Revenue Ruling 2019-24,  the IRS outlined specific situations where a taxpayer may or may not have gross income depending upon whether he or she receives units of a new cryptocurrency. Its newly released FAQs complements its cryptocurrency guidance from 2014 which stated that virtual currency is treated as property for to federal tax purposes. The FAQs provide answers to questions about reporting a capital gain or loss, where to report such a gain or loss and giving the currency to others, among other items.

“Cryptocurrencies are here to stay, so it’s important to establish some ground rules for how to account for them. CPAs and other accounting professionals have been asking for clarity around these issues for several years,” says Dr. Sean Stein Smith, CPA, professor, City University of New York-Lehman College and leader of NJCPA Emerging Technologies Interest Group.

The most important components of the new IRS guidance include the following:

  • Stablecoins are officially part of the conversation. The crypto conversation may have started — and will still be led by — Bitcoin, but stablecoins are a fast-growing space that has captured the attention of accounting and financial services practitioners. This is particularly important with the development and launch of JPM Coin and Libra.
  • Taxation treatment has not materially been changed. Any cryptocurrency gains and losses — no matter the dollar amount — have to comply with full reporting requirements. Tax implications of paying for/being paid for goods or services with crypto also seem to remain the same.
  • Hard forks, soft forks and airdrops were addressed. The IRS provided some clarity on the issues of forks and airdrops. This was perhaps the biggest open item for taxpayers and tax preparers for the last 12 to 18 months. If a hard fork occurs and a taxpayer does not receive any new cryptocurrency, there is no taxable event. If, however, new cryptocurrencies are received either through a hard fork or an airdrop, there is a taxable event.
  • If a taxpayer donates virtual currency to a charitable organization as described under IRS Code Section 170(c) there is no recognition of incomes, gains or losses. Charitable deductions are generally equal to the fair market value of currency at the time of donation (if held for more than a year), or the lesser of either the taxpayer’s basis in the currency or current fair market value if the currency was held for less than one year.
  • Accounting for cryptocurrencies.  Taxpayers can — if they have information linked to the date and time that the specific unit was acquired, the cost basis and fair market value of that unit at the time of acquisition, the time and date information of when this specific unit was sold and the fair market value of the specific unit when it was sold — account for these transactions under a specific identification method. Otherwise, the first-in, first out (FIFO) method of accounting should be used.

The IRS also provided updated and expanded guidance and clarification on determining the cost basis of virtual currencies, the records which are needed for compliance, implications of receiving transactions without an exchange being involved and several other important areas.

“It’s important to contact your CPA to assist with any transactions related to cryptocurrencies. Our members continue to offer a wealth of information regarding these and other emerging technology-related accounting issues,” adds Ralph Albert Thomas, CPA (DC), CGMA, CEO and executive director at NJCPA.

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