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You Could Be Taxed On Your Airdrops

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IRS released guidance advising digital currency holders how to pay taxes on crypto-related investments.

For the first time since 2014, the Internal Revenue Service on Wednesday offered formal guidance. It addresses how to report gains and losses and what do if someone is paid in virtual currency, such as bitcoin, as wages. It also could expose anyone who owns cryptocurrency to unpleasant tax situations.

The guidance came in the form of a lengthy ‘Frequently Asked Questions’ documents that provided new details about how the agency’s 2014 position—which declared Bitcoin and other digital assets to be property—should apply in practice.

Cryptocurrency advocates warned that portions of the IRS guidance may result in unfair or unexpected consequences. In a blog post, the Washington DC-based Coin Center declared the IRS document raised “messy” new questions, especially around the issue of so-called “airdrops” and “hard forks”—terms that describe a situation where new types of cryptocurrency are delivered to a user.

Tax on Your Airdrops

According to the IRS, the occurrence of an airdrop or hard fork triggers a tax obligation when someone has “dominion or control” over the new currency. What about those individuals who may have never wanted or asked to receive the cryptocurrency in the first place? A third party can now create tax reporting obligations for you by simply forking a network whose coins you own, or foisting on you an unwanted airdrop.

This could be the case for millions of customers of popular crypto exchanges like Coinbase, which earlier this year distributed an obscure spin-off currency called Bitcoin SV to every customer who owned Bitcoin—triggering a tax obligation under the new IRS guidelines.

The Coffee Question

One particular area of disappointment to crypto users who like to spend their coins, is on everyday purchases like cups of coffee or tea. The new IRS guidance also failed to address whether small cryptocurrency transactions are covered by “de minimis” exemptions.

Paying somebody for service will result in a capital gain or loss, which should be calculated as “the difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged.”

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