IRS Issues New Cryptocurrency Tax Guidance And Fixes Nothing, Cryptocurrency Users Given The Choice Of Abandoning Cryptocurrency Or Breaking The Law

October 12, 2019 / by Zachary Mashiach

For the first time since 2014, the Internal Revenue Service (IRS) has issued new cryptocurrency tax guidance, following a Congressional request to clarify cryptocurrency tax rules. 

Right off the bat, the IRS declares that cryptocurrency is taxed as property, rather than as currency, meaning that every single cryptocurrency transaction involves capital gains and losses. This makes it very arduous for cryptocurrency users to file taxes since a capital gain or loss has to be calculated for every transaction for the entire year and submitted during tax season. 

That being said, it is perhaps fair that the IRS treats cryptocurrency as property due to the duality of cryptocurrency as a speculative asset and a currency. Although Bitcoin (BTC) can be used as a currency, it is often used as a vehicle for speculative investment since its price relative to the US Dollar is constantly changing, much like a stock or a commodity. 

Therefore it makes sense that the IRS taxes cryptocurrency as property, but unfortunately, this simultaneously ruins the usability of cryptocurrency as an actual currency. Not only do users have to submit every transaction to the IRS even when using cryptocurrency as a currency to

buy or sell goods and services, but users also have to pay capital gains taxes on top of sales taxes. 

This leaves cryptocurrency users with two options: abandon cryptocurrency and use fiat instead, or break the law and not report taxes. 

It seems in the past cryptocurrency users have generally not paid taxes rather than abandoning cryptocurrency. Congress requested that the IRS clarify their regulations to improve the situation, but it seems the situation has not improved at all. 

Another clarification in the new tax guidance is that when someone receives cryptocurrency as a payment for working then that payment is treated as regular income. However, the income is considered to be the value of the cryptocurrency at the time it is received. This makes it so that a worker can end up with capital gains and losses from their cryptocurrency paycheck, on top of regular income tax, making it that much harder to file taxes. 

Also, the IRS issued tax guidance for forks and airdrops for the first time. Apparently, if a fork happens then the cryptocurrency received from the fork is taxed according to its value at the time it is received. 

This creates an instant loophole since technically it takes some time for a newly forked cryptocurrency to become listed on exchanges and gain value, so at the time a forked cryptocurrency is received it is actually worth nothing and no taxes are owed. 

That being said, if the forked cryptocurrency is sold at a later time then it is treated as capital gains.

This new rule also essentially ruins the airdrop industry. Imagine having to calculate and pay taxes for every single airdrop you receive. 

Another important rule change is that if you receive a new cryptocurrency in exchange for a good or service, and that cryptocurrency is not yet worth anything, for tax purposes the cost of the good or service is the value of the new cryptocurrency received. This literally cripples a part of the initial coin offering (ICO) industry, where often services are exchanged for new tokens. Often times these tokens never succeed and the person who sold a service for them gains nothing, but sometimes they do succeed which can lead to a big profit. Now the IRS is taxing the exchange of new tokens for services, which would make it so that people are unwilling to exchange services for new tokens. 

Overall, the new IRS tax guidelines have seemingly made zero improvements over the guidelines from 5 years ago. The IRS is still giving Americans the hard choice of taking their chances at breaking the law, or to abandon the use of cryptocurrency as a currency. Even worse than before, the new rule regarding cryptocurrencies that do not yet have value damages to the ICO industry.

It seems these cryptocurrency tax guidelines are in-line with the United States’ effort to maintain US Dollar dominance. Aside from regular sales and income taxes, there are no other taxes when using the US Dollar as a currency, and users of the US Dollar do not have to keep a record of every transaction since that would be an impossible task. On the other hand, on top of regular sales and income taxes, cryptocurrency users are required to record capital gains and losses and submit every transaction to the IRS. 

So, once again, this gives cryptocurrency users the option of abandoning cryptocurrency and just using fiat, or breaking tax laws and possibly getting in hot water with the IRS. Overall, these tax laws represent a major roadblock to cryptocurrency adoption and are seemingly unfair.