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:
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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