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The Internal Revenue Service and Cryptocurrency Taxes

The IRS’s cryptocurrency tax laws and guidelines to date have made it clear that the IRS is examining and strongly considering ways to collect cryptocurrency-related taxes.

Gemini-The Internal Revenue Service and Cryptocurrency Taxes

Summary

As cryptocurrencies have become a growing piece of our nation’s financial infrastructure, more and more they have garnered the attention and oversight of U.S. regulatory bodies. One such governing agency is the Internal Revenue Service (IRS). The IRS’s cryptocurrency tax laws and guidelines to date have made it clear that the IRS is examining and strongly considering ways to collect cryptocurrency-related taxes.

Cryptocurrency Tax Laws on Purchases 

The IRS released its initial guidance on “virtual currencies” in 2014. In this notice, cryptocurrencies, including bitcoin, were classified as property. The agency wrote that cryptocurrencies may be used to purchase goods and services, but that the vendor receiving cryptocurrency is responsible for paying income taxes at the fair market value of the coins on the date they received payment. 

The 2014 IRS cryptocurrency tax guidance was important in solidifying the legality of cryptocurrency transactions in the United States. The Virtual Currency Tax Fairness Act of 2020 is a congressional bill that, if passed, would exempt digital currency transactions of under $200 from income tax regulations. 

Cryptocurrency Tax Laws on Buying and Selling

As mentioned above, the cost basis for tax calculation is the market price on the day you buy or receive cryptocurrency as payment. In the same 2014 notice, the IRS indicated  that when you sell cryptocurrency, you are required to calculate the difference between your cost basis and the sale price to determine your monetary gain or loss to pay capital gains taxes.

Crypto Taxes on Forks and Airdrops

In 2019, the IRS made a second official announcement regarding cryptocurrencies. Again, the IRS advised  that receiving cryptocurrency is a taxable event. 

In this notice, the IRS stated that forks may lead to an airdrop of new coins. When this occurs, the IRS expects cryptocurrency owners to state the fair market value of the coins they received in their income tax calculation. 

The IRS acknowledges that not all forks result in owners receiving an airdrop. They distinguish between two common scenarios:

  1. If you hold your coins in a compatible wallet, you will receive the new airdropped coins and will have a tax liability.

  2. If you hold your coins on an exchange, you will only receive the new coins if they are supported by your exchange. In cases when an airdrop occurs but you do not receive the coins from your exchange, the IRS does not hold you responsible for the tax liability until you receive them.  

As of this writing, you are required to pay taxes on your cryptocurrency transactions and investments. Consult a tax or financial professional for more information.

NOTE: This article does not serve as tax advice and is for informational purposes only. Gemini does not provide tax advice. We recommend contacting a tax professional in your relevant area for personalized assistance. For more information, please refer to the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies.

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