The IRS has published a new statement intended to clear up the issue of taxing cryptocurrencies — specifically regarding airdrops and hard forks. However, what the tax authorities shared only leads to more questions and confusion.
According to a new document from the IRS, the independent agency seem to understand that cryptocurrencies are decentralized digital assets and how the underlying blockchain technologies works, claiming that they are independent networks that can “record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality.”
However, any knowledge past that is strained at best, despite their desire to regulate such an industry.
Essentially, the IRS is saying that any cryptocurrencies received from an airdrop are to be taxed as gross income. As one can imagine, many enthusiasts and traders are unhappy about this.
Today’s IRS guidance is a hot mess.
1. What if you have keys but no software from which to spend the asset?
2. What if you never sell or transfer the asset and it drops 90% in value?
3. What’s the value if the asset isn’t even trading at the time of fork?https://t.co/jJ5SdXU72i pic.twitter.com/SpTOIOKqg0
— Jameson Lopp (@lopp) October 9, 2019
However, it’s not so much the fact that they’re being taxed but rather that the IRS guidelines don’t detail very many examples at all. Popular Twitter user in the cryptocurrency space @lopp proposes that the guidelines don’t clarify many of the surrounding scenarios, such as if a trader receives an unwanted airdrop or ends up doing nothing with it.
A key inquiry here is Lopp’s third question, asking what to do if an asset doesn’t even have value at the time of airdrop. Hard forks and airdrops happen quite often. If a trader receives assets they simply don’t want, this could lead those users having to pay big taxes on them.
One Twitter user, @brucefenton, made a joke on Twitter regarding the scenario.
In honor of the IRS fork guidance I’m announcing BBV — Bitcoin Bruce’s Vision.
It’s a Bitcoin fork that gives me an extra 1 million coins. I’ll sell one sat to you for $300.
Also: I’m sending a 12 word seed phrase poem to each member of Congress right before the fork.
— Bruce Fenton (@brucefenton) October 9, 2019
A key part of the document needs more clarification, reading:
Section 61(a)(3) provides that, except as otherwise provided by law, gross income means all income from whatever source derived, including gains from dealings in property. Under § 61, all gains or undeniable accessions to wealth, clearly realized, over which a taxpayer has complete dominion, are included in gross income.
This was my read as well. IRS needs to fix this, clarify guidance. Doesn’t make sense in current form. https://t.co/39N2eV2VKM
— Palley (@stephendpalley) October 9, 2019
As of now, it sounds like no matter how they receive these digital assets, they’ll be treated as taxable gross income. With all of this backlash, we can expect the IRS to either end up changing these guidances or at least clearing them up a bit. After all, traders do not always have “complete dominion” over receiving an airdrop.
What do you think about these new guidances? Does the IRS have any idea what they’re talking about? Let us know your thoughts in the comments below.
Images are courtesy of Twitter, Shutterstock.