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IRS Issues FAQ on Virtual Currency

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The Internal Revenue Service on Wednesday issued new guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS issued two new detailed guides to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency, which includes Revenue Ruling 2019-24 and frequently asked questions.

The FAQ addresses a number of issues for those who use virtual currency as payment for goods or services or receives it as employment compensation.

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a “cryptocurrency hard fork.”

Question No. 21 of the FAQ asks: One of my cryptocurrencies went through a hard fork but I did not receive any new cryptocurrency. Do I have income?

The IRS’ answer: A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.

In addition, the FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.

“The IRS is committed to helping taxpayers understand their tax obligations in this emerging area,” said IRS Commissioner Chuck Rettig in a Wednesday statement. “The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”

The new guidance supplements the guidance the IRS issued on virtual currency in Notice 2014-21. The IRS says it is also soliciting public input on additional guidance in this area.

In Notice 2014-21, the IRS applied general principles of tax law to determine that virtual currency is property for federal tax purposes. The Notice explained, in the form of 16 FAQs, the application of general tax principles to the most common transactions involving virtual currency, the agency said.

“The IRS is aware that some taxpayers with virtual currency transactions may have failed to report income and pay the resulting tax or did not report their transactions properly.”

The IRS said that it is “actively addressing potential noncompliance in this area through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.”

In July, the IRS began mailing educational letters to more than 10,000 taxpayers who may have reported transactions involving virtual currency incorrectly or not at all.

“Taxpayers who did not report transactions involving virtual currency or who reported them incorrectly may, when appropriate, be liable for tax, penalties and interest,” the IRS said. “In some cases, taxpayers could be subject to criminal prosecution.”

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