The IRS Just Issued Its First Cryptocurrency Tax Guidance in 5 Years

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The U.S. Internal Revenue Service has published its first guidance in five years for calculating taxes owed on cryptocurrency holdings.

Industry members have been eagerly awaiting the update since May 2019, when IRS Commissioner Charles Rettig said the agency was working on providing fresh guidance.

The agency's 2014 guidance left many questions unanswered, and the crypto market has grown more complex in the years since.

As expected, the guidance notice released Wednesday addresses: the tax liabilities created by cryptocurrency forks; the acceptable methods for valuing cryptocurrency received as income; and how to calculate taxable gains when selling cryptocurrencies.

Resolving a long-standing question, the guidance says new cryptocurrencies created from a fork of an existing blockchain should be treated as "An ordinary income equal to the fair market value of the new cryptocurrency when it is received."

In other words, tax liabilities will apply when the new cryptocurrencies are recorded on a blockchain - if a taxpayer actually has control over the coins and can spend them.

"If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop or some other kind of transfer, you don't have taxable income."

A third key issue addressed by the new IRS guidance is how to determine the cost basis of each unit of cryptocurrency that is disposed of in a taxable transaction.

In the words of IRS, this can be "a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time."

Purchases of goods and services were deemed taxable when the IRS issued its original guidance in 2014, which said that digital currencies were to be treated as property rather than currency for tax purposes.