The American Bar Association (ABA) Section of Taxation has requested the Internal Revenue Service (IRS) to update the existing guidelines on how the hard-forked cryptocurrencies are taxed in the US. The Section noted that the cryptocurrency industry has seen significant developments since its inception and it’s high time the IRS reviews its guidelines on the position of the federal income tax of the digital currencies. The last time IRS implemented guidance on the matter was in 2014.
For instance, the current guidelines lack clarity on how the tokens derived from the hard fork split can be addressed. The Section wrote the letter to IRS recommending the changes in the rules that need to be relooked into for the benefit of the taxpayers and the economy in general. IRS should provide a ‘temporal rule’ in a form of a safe harbor to address challenges facing the affected taxpayers.
The recommended changes for IRS are particularly to address whether a new coin that emerges from the forked crypto attracts income taxes or not. The temporal solution will ensure consistency among the taxpayers especially with respect to the previous hard forks that prevailed in 2017 to provide guidance on how the holders of the originally forked cryptocurrencies can pay their federal tax dues.
Since IRS started treating the crypto assets as property in 2014, the issue of taxation has remained a point of conflict especially among the investors who feel robbed by the State governments. For instance, recently Coinbase reminded its clients to honor their tax obligations.
Basing on the proposed guidance by ABA, the capital gains taxes may apply to the hard forked token holders rather than the usual income taxes as it has been. However, the value of the forked currency for taxation will be safeguarded when the taxpayer trades it out.
Though the Section is not proposing the IRS to implement all the suggested changes, the temporary solution will offer a safe harbor especially for taxpayers who transacted a forked coin that that accrued during the 2017 tax year.