The Internal Revenue Service (IRS) released guidelines in 2014 stating that it would treat cryptocurrencies as assets. Since then, there has been a lot of discussions about the same. The new guidelines would mean capital gain taxes also apply to hard-forked cryptocurrencies.
The Internal Revenue Service (IRS) guidelines issued in 2014 about how to treat cryptocurrencies for income tax purposes are now outdated. This is according to the American Bar Association Section of Taxation.
They say the regulations need updating because there are many important developments that have taken place in the crypto economy since then. Section Chair Karen Hawkins said in a letter to IRS that the one area where there is no clarity is how to treat, for income tax purposes, hard-forked coins or when a blockchain splits.
Thus Hawkins is advising IRS to come up with a guidance “that offers a temporary rule, in the form a safe harbor” for the situation. The guidelines would treat hard-forked coins dispersed to clients. As having been receiving from a taxable event and that the coin would have a value of $0 at the time of fork.
IRS announced in 2014 that it would treat cryptocurrencies as assets. Since then, taxation of cryptocurrencies has been a hot topic. Coinbase started reminding customers to fulfill their tax obligations and even unveiled a tax calculator tool.
The safe-harbor guidelines would allow anyone wanting to report their tax liability. It is to be safe from understating their federal tax liability due to their forked coins.
The letter reads,
“This temporary rule has the benefit of encouraging consistency among taxpayers with respect to 2017 hard forks. However, avoiding difficult timing and valuation issues. (Including the ability of taxpayers to benefit from hindsight depending on how the values fluctuated during 2017). And providing information to the service regarding holders of the original forked cryptocurrencies”.
The guidelines would establish that it is capital gains taxes that apply on forked coins rather than income taxes. However, the coin “preserves the full value of the forked coin for taxation when the taxpayer sells it”.