They’re back. The U.S. Internal Revenue Service (IRS) has recently released two new pieces of guidance for taxpayers who engage in transactions involving virtual currency.
Additionally, the IRS has published a new draft to form 1040 schedule 1 including a broad declaration regarding crypto holdings or trade.
So what are airdrops and hard forks, and what do they mean for the tax obligations of crypto holders?
In short, an airdrop occurs when a company distributes its tokens to a user’s wallet, free of charge, in order to raise awareness or funds, and in certain cases, hard forks. A hard fork is when nodes of the newest version of a blockchain create a permanent separation from the previous version, creating a “fork” in which one path follows the new and upgraded blockchain, while the other follows the old path.
In Bitcoin, a hard fork is the result of changes in the blockchain rules and shares a transaction history with Bitcoin up to a certain time and date
Fun Fact: The most famous hard fork occurred in August 2017, when some Bitcoin developers and users decided to initiate a hard fork known as Bitcoin Cash.
The new IRS guidelines distinguish the difference between hard forks and airdrops, and state that not every hard fork should be treated as an airdrop. Those who received new currencies in a hard fork are considered as receiving them through an airdrop and should report it to the IRS as gross income.
The new ruling also acknowledges the possibility that a taxpayer might not always receive the airdrops, detailing that if a taxpayer receives new currency from an airdrop into a wallet managed by an exchange that does not support the airdropped currency, the taxpayer is off the hook. But, if the exchange later ends up supporting that airdropped crypto, the taxpayer is considered to have received the new currency at that time and is therefore liable to taxation.
While the IRS has made significant steps in regulating crypto, the new guidance raises questions about the subtle distinction of airdrops and hard forks, cryptocurrency held in wallet or exchange, crypto held directly by the taxpayer, and more.
The fact remains that crypto is now on the IRS radar and won’t fade anytime soon. So when it comes to tax time, know you can trust Bittax to help you make the best decisions for your holdings, and avoid audits and other tax-related headaches.
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