Internal Revenue Service issued Revenue Ruling 2019-24 and also a large number of answers to frequently asked questions.The IRS guidance addresses some of the most common issues facing holders of cryptocurrency or virtual currencies. Readers should note that the IRS also released a draft Form 1040, Schedule 1 — which contains fields for reporting the transactions or even holding of any financial interest in digital currency.
On Whom Law Tax Law on Digital Currency Apply?
The taxation rule of cryptocurrency or digital currency applies on following three types
- U.S. citizens,
- U.S. green card holders and
- Resident align spending 183 days in USA
In following circumstances, the taxable income under US tax law will arise :
- If you sell or exchange digital currency or cryptocurrency and gains.
- If you are granted digital currency in the form of salary , the market value of the received digital currencies.
- If get cryptocurrencies as a result of a hard fork, it will add to your taxable income.
- If you receive digital currency as a result of a gift, there is no immediate tax, but the gain or loss will arise in the year of sale or exchange.
Computation of Gain or Loss on Cryptocurrency Transactions
IRS provides following answer to question 6 of FAQ on on Virtual Currency Transactions to a question about gain or loss
Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency, which you should report on your Federal income tax return in U.S. dollars. For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.
The IRS allows two methods for identifying your basis:
- You can specifically identify the exact currency sold, traced to the ledger, and use the cost of that specific currency to determine your gain or loss. OR
- you can use the “first in, first out” method, meaning your basis is computed based on the cost of the oldest currency acquisition in your wallet, moving forward in time as you continue to sell currencies.
What about digital currency provided as compensation for services? That type of distribution is treated as ordinary income, not a capital gain, similar to cash paid in the form of salary and wages.
Taxation rule of cryptocurrency forks?
As per the The Revenue Ruling ,the fair market value of units of new cryptocurrency are distributed (either as a complete currency replacement or split with the new currency being issued but old currency still valid), shall be included in gross income . The FMV of forked unit received shall be valued on the date that the distribution (usually via airdrop) is recorded on the distributed ledger.
If the taxpayer does not receive units of a new cryptocurrency as a result of a hard fork, no income shall arise in hand of receiver.