Cryptocurrencies’ surge in price in 2017 ushered in a wave of new interest from investors – and the taxman.
Now the IRS is mulling whether to issue more guidance to help those investors file tax returns on the new asset that’s been tough to classify using current rules and definitions.
“I understand that they have been considering guidance in various areas,” Lisa Zarlenga, co-chair of Steptoe & Johnson LLP’s Tax Group, told Bloomberg Law in a recent video interview.
The last and only time the IRS issued guidance on the topic came in 2014 when the agency said virtual currencies like bitcoin should be treated like property for tax purposes, not as foreign currency. Since then, the blockchain technology underlying cryptocurrencies has been used to invent new tokens with characteristics that push the limits of how property is classified and taxed, she said.
The deadline to file personal income taxes in the U.S. is April 17, but tax filers could retroactively apply future guidance, Zarlenga said.
The IRS is particularly focused on how to treat what are known as hard forks, she said. Hard forks occur when a change in the underlying software splits a virtual currency into two distinct versions that then can be used by the investor. The most prominent hard fork in 2017 came when bitcoin cash spun off from bitcoin in August, she said.
The IRS may decide investors should be taxed on the new asset at the time they have access to it, Zarlenga said. Or the agency may defer to its current guidance, she said. This would treat cryptocurrency hard forks similar to pregnant farm animals.
If “you buy a pregnant cow and then you have the calf, is that calf taxable?” Zarlenga said. “The IRS had concluded no.”
Still, until any formal guidance, the more conservative approach is to treat a hard fork as a taxable asset up front, she said.
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