IRS Changes To Crypto (must read!)

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Empire Builders,

To all my crypto holders, traders and airdrop fanatics this email goes out to you today as finally the IRS has updated the tax laws around crypto for first time in 5 years and honestly its not good news at all for some! Keep reading!

First though lets catch up on a few things from yesterday, Jerome Powell said they are going to start expanding balance sheets soon but its not QE…!?

He suggested that the purchases would be made up of Treasury bills and stressed the buying should not be seen as a return of the crisis-era quantitative easing programs that the Fed engaged in a decade ago to boost the economy. Three-month bill yields fell on the comments, while U.S. stocks pared losses and the dollar was higher.

“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis,” he said. “Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy.”

Right right, ya ya ok. So since QE4 is already happening, will we just jump to QE5 then?Anyway, you can read it all here if you like. Stocks went up for 3 days in hopes that US/China trade talks would go well, they didn’t now market pulled back again. Same old same old.

Ok, onto IRS changes around crypto.

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

Forks & Airdrops

Ok this is the biggest and most concerning change here that anyone with an ERC-20 wallet needs to be aware of and something I think most aren’t really paying enough attention too.

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 plain English that means that tax liabilities will apply when the new crypto is 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 (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.”

Remember this will only apply when something new, aka a whole new crypto is created and recorded on a new blockchain.

Here is where it gets bad, when we are talking about Airdrops, yes this is opening up many US residents to new liability they probably weren’t thinking about.

“One unfortunate consequence of this guidance is that third parties can now create tax reporting obligations for you by simply forking a network whose coins you own, or foisting on you an unwanted airdrop.” Jerry Brito executive director at Coin Center

“Receipt is defined by ‘dominion and control’ … so it’s ability to transfer, sell, exchange or dispose of the asset according to this guidance”. “The fear is that someone maliciously airdrops and tags you with a giant liability. But [this] fear is a bit oversold because you would only be liable for new income based on the fair market value of the asset when received, and most forks don’t start out with a high valuation.” Drew Hinkes Lawyer with Carlton Fields

This means that anyone with an ERC-20 based Eth wallet could receive an airdrop without even knowing it and depending on how that token performs, may be subject to paying income tax on that big fat nothing burger. Again all of this could happen without someone knowing it on a older wallet they are footprinted back too. We all know that forks usually pump then dump, this exposure is something now every single ERC-20 wallet holder must pay attention too.

Cost Basis

This has been an area that many have been waiting for and the approach the IRS has taken I think is logical, its just going to create a lot of paper trail and work on the taxpayer side to track down fair market value.

Cost basis should be calculated by summing up all the money spent to acquire the crypto, “including fees, commissions and other acquisition costs in USD”.

“(1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”

This means you will have to go back and figure out what the value was at the time of purchase of every satoshi involved in that transaction or you can use a first-in, first-out (FIFO) means of reporting. This I think is a plus because sometimes you may want a loss and sometimes you will want a capital gain. So if you bought your first unit at $10,000 and your second at $8,000 you can track back each sat or you can use first-in/first-out if you want to chalk up a loss.

Lastly the IRS said it would NOT create a tax exemption for transactions below a certain threshold so the original 2014 tax guidance applies, which said that digital currencies were to be treated as property rather than currency for tax purposes. That means purchases of goods and services are deemed taxable events.

I think for many cryptos that are trying to be a daily transacting coin that is fine and doesn’t change much but I think for Bitcoin that will work to limit its use as a daily transacting coin and build its store-of-value case as more and more people stop using it on small transactions. I have been pretty vocal about the fact I see Bitcoin becoming a means to take big huge decimal values and break them down into a much smaller transactable number at a cheap price. I think the most likely argument for Bitcoins future is the “digital gold” narrative.

That’s it for now, get after it!

-Jameson Brandon

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