If you are a resident of the U.S. and faithful in paying your taxes to a “t”, you will no doubt want to read this article to understand what the new guidance released by the IRS last week means to you.

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IRS Releases New Crypto Tax Guidance, Bungles “Airdrop” Definition

For the first time in 5 years, the IRS released new guidelines when it comes to taxing crypto-related income. Specifically, the guidelines pertained to how to treat gross income from “airdropped” forks like Bitcoin Cash and Bitcoin SV. The guidance issued by the IRS states that those who received BCH and BSV as the result of a fork would have to record a capital gains tax for the tax year that they received the funds, which would be 2017 for BCH and 2018 for BSV. The dollar amount owed would be based on the “fair market value” price of the coin at the time it was first made available for exchange into USD.

Under Section 61 of the U.S. tax code, “all gains or undeniable accessions to wealth, clearly realized, over which a taxpayer has complete dominion, are included in gross income.” The new IRS guidelines now clearly define coins obtained as the result of a hard fork as gross income. According to the text of the amended rule:

“(1) A taxpayer does not have gross income under § 61 as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency.

(2) A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.”

The guidelines put forward are seemingly introducing more confusion than clarity, but one thing for sure is that the IRS thinks nobody (in the U.S.) should get “free coins” for free. Understandably, criticism has been sharp from the crypto community. In addition to the problems introduced by attempting to establish a “fair market value” for the coins, the rule also applies to those who never claimed their forked coins, as well as to those who never wanted them or decided to continue holding them, even if they are currently sitting on a 90% loss.

The IRS is also apparently confused about the term “airdrop,” re-defining it for its own purposes as specifically relating coins received during the advent of a hard fork. The crypto community has traditionally used the term “airdrop” to refer to coins or tokens received for free through pretty much any means other than that of a hard fork, so its new definition by the IRS is likely to be source of confusion for years to come (that is, until additional guidelines are published). Traditionally, “airdropped” coins or tokens are given away as a promotion of a new project, and received through transfer from one address to the address of the airdrop recipient.

The first tax guidance published by the IRS in 2014 was an overarching declaration that cryptocurrency was to be treated as property when it came to taxing its transactions. In July of this year the IRS mailed out over 10,000 “educational letters” to U.S. taxpayers who had reported transactions involving virtual currency incorrectly, or not at all. As a stern reminder, the IRS stated in the letter that taxpayers could be subject to criminal prosecution for improperly reporting or failing to report cryptocurrency-related transactions in the 2019 tax year.