Cryptocurrency Tax Update: Impact of IRS New Focus and Proposed U.S. Tax Rate Increase Jones Day
New guidelines from the Internal Revenue Service on hard forks and a proposed increase in the capital gains tax rate could have a significant impact on cryptocurrency holders.
The IRS recently clarified its position on the US tax treatment of a hard fork. A hard fork occurs when the protocols on a blockchain change, causing the existing blockchain to be “forked” or broken into two separate registers. In 2019, the IRS asserted in Revenue Ruling 2019-24 that any unit of cryptocurrency received as a result of a hard fork and obtained through an airdrop was taxable to the recipient. As relevant here, an airdrop generally refers to the free, mass distribution of (new) cryptocurrency units to existing holders. This combination of events is rare, however, and some holders may have taken a position based on the 2019 tax ruling that a hard fork was not taxable in the absence of a corresponding parachute drop.
The recently published IRS Chief Advice 202114020 takes aim at this argument, saying that the receipt of new units of cryptocurrency following a hard fork is taxable to the recipient at the applicable rates (individuals or businesses), regardless of be the way the new units are. distributed or otherwise made available.
Another relevant tax development for some cryptocurrency holders concerns the IRS’s position that most cryptocurrencies are considered property –no change—For tax purposes. A key consequence of this position is that any purchase made with cryptocurrency is taxable for the purchaser to the extent of any gain in the cryptocurrency used for payment. In contrast, a cash purchase is not taxable for the buyer. This can lead to unexpected results for American taxpayers. If the relevant cryptocurrency has been held for at least a year, the gain is currently taxed at 23.8% for most individuals (whether held directly or through certain investment vehicles).
The Biden administration recently proposed increasing the capital gains rate for individuals from 23.8% to 43.4% for those earning more than $ 1 million. This increase would mean significantly higher tax bills for affected holders whenever the cryptocurrency is used as payment (as well as converted to another digital or fiat currency or otherwise disposed of in a taxable transaction), thus raising the stakes for them. taxpayers.
To date, the only published directive on the U.S. tax treatment of cryptocurrencies and other digital assets is sub-regulatory.