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In our last article dated September 2019, we investigated how virtual currency is viewed by the IRS and its treatment from a tax perspective. We concluded that capital gains tax is due whether it was a short-term capital gain or a long-term capital gain. Furthermore, the IRS concluded that the cryptocurrency “wallet” is not reportable for the purposes of FBAR (FinCEN Form 114) reporting. It should be noted, no further guidance has been provided in this regard, therefore virtual currencies continue not to the reportable on the FBAR.
However, since then, the IRS has deployed a new Schedule 1 for the 2019 tax return. The form includes a question asking taxpayers if they received, sold, sent, exchanged or acquired virtual currency by any other means, over the past year. This is a new reporting obligation required by individuals who fit the above criteria. Failure to properly report these transactions, in the most extreme cases, could mean prison time and a fine of up to $250,000.
According to the IRS, a hard fork occurs when a single cryptocurrency splits in two (as a result of a protocol change in the existing code). The IRS describes an airdrop as a means of distributing units of a cryptocurrency to the distributed ledger addresses. The IRS noted that a hard fork may not always result in an airdrop.
The new IRS guidance endeavoured to answer the following questions:
• Does a US taxpayer have income as a result of a hard fork of a cryptocurrency if the taxpayer does not receive units of a new cryptocurrency?
• Does a US taxpayer have income as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of a new cryptocurrency?
The IRS concluded that the taxpayer does not have income in the first scenario. However, the taxpayer has ordinary income in the second scenario equal to the fair market value of the new units at the time of receipt.
The AICPA continues to make recommendations to the IRS relating to IRS guidance that has been published, whilst seeking additional or updated guidance regarding specific areas.
Nomaan Ilyas is Managing Director of Frontier Group, a firm of advisers specialising in US, UK and International Tax return preparation services and advice. You can contact him on 020 7332 2843, firstname.lastname@example.org, www.frontier-fs.com.