On October 9, 2019, the IRS released further guidance, on how virtual currency should be taxed. The last guidance, issued in 2014, explained that virtual currency is treated as property for Federal income tax purposes and applied tax principles applicable to transactions involving property to virtual currency.
Since then, virtual currency has continued to evolve sparking many questions about if and how various virtual currency transactions should be taxed, like what happens when you receive an airdrop following a hard fork or what happens when you donate virtual currency to a charitable organization. IRS Rev. Rul. 2019-24 and FAQs clarify how you should report specific virtual currency transactions on your taxes.
Here is a breakdown of some key frequently asked questions that were clarified by the IRS since our earlier virtual currency article:
Capital Gains and Losses
How is gain or loss calculated when I sell virtual currency?
Gain or loss is the difference between your cost (the amount spent, including fees, commissions, and other acquisition costs) in the virtual currency and the amount you received in exchange.
Will I recognize gain or loss if I exchange my virtual currency for other property?
Yes, when you exchange virtual currency held as a capital asset for other property, including goods or for other virtual currency, you will recognize a capital gain or loss. Your gain or loss is the difference between the FMV of the property you received and your adjusted cost basis (the amount spent, including fees, commissions, and other acquisition costs) of the virtual currency exchanged.
Will I recognize a gain or loss if I sell or exchange property for virtual currency?
Yes, if you transfer property held as a capital asset in exchange for virtual currency you will recognize a capital gain or loss. If the property exchanged is not a capital asset you will recognize an ordinary gain or loss.
Virtual Currency as Gifts and Charitable Donations
I received virtual currency as a gift. Do I have to report income?
No, you will not recognize income until you sell, exchange, or dispose of the virtual currency.
I donated virtual currency to a charitable organization. Will I have to recognize income, gain, or loss?
If you donate virtual currency to a charity, you will not recognize income, gain, or loss. You may instead reap the benefit of a charitable contribution deduction. Your deduction is generally equal to the fair market value of the virtual currency at the time of the donation if you held it for more than one year. If one year or less, your tax deduction is the lesser of your cost or the virtual currencies fair market value at the time of contribution.
Forks and Airdrops
One of my cryptocurrencies went through a hard fork but I did not receive new income. Do I have income to report?
No, if you did not receive new crypto, whether through an airdrop or another kind of transfer you don’t have taxable income.
What if my cryptocurrency went through a hard fork followed by an airdrop and I received new crypto?
Yes, you will have taxable income which will be taxed as ordinary income equal to the FMV of the new crypto when it’s received and the transaction is recorded, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.
Do I have income when a soft fork of cryptocurrency I own occurs?
Since a soft fork does not result in the creation of new cryptocurrency the soft fork will not result in income.
*A hard fork occurs when a single cryptocurrency splits into two following a change to the existing code resulting in both an old version and a new version. An airdrop is the distribution of cryptocurrency token or coin, usually for free.
You should receive a Form 1099 or Form W-2 to report your cryptocurrency transactions, but even if you don’t receive a form, you need to report your taxable transactions on your tax return. If you missed reporting any transactions in the past you can amend your previous years’ tax returns with TurboTax.
Don’t worry about knowing the tax implications of virtual currency. TurboTax Premier is up to date and will ask you simple questions about your virtual currency transactions and will accurately help you figure out your gains and losses on your transactions.
With TurboTax, now you can upload your transactions from cryptocurrency platforms like Coinbase at once, through compatible .csv files to TurboTax Premier. And the uploaded .csv files will include the cost basis of your transactions (if available), so TurboTax Premier can easily help you account for your gains and losses and report your cryptocurrency transactions. TurboTax Premier is designed to support crypto transactions along with a variety of other investment types.
If you have questions, you can also connect live via one-way video to a TurboTax Live Premier CPA or Enrolled Agent with an average 15 years-experience to get your crypto investment questions answered. TurboTax Live Premier CPAs and Enrolled Agents are available in English and Spanish and can also review, sign, and file your tax return.