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IRS to Clarify Confusing Cryptocurrency Tax Regulations

IRS to Clarify Confusing Cryptocurrency Tax Regulations

For the second time in less than a year, the Internal Revenue Service (IRS) has received a letter, petitioning the agency to provide additional guidance on its policy for cryptocurrency taxation.

A letter dated on Dec. 20, signed by eight members of US Congress, described:

We wrote in April of this year urging the issuance of guidance for taxpayers who use cryptocurrencies and we are pleased to see that you have issued guidance and addressed many questions we posed. We are, however, concerned that this recent guidance creates many new questions related to the topics it seeks to address, namely forks and airdrops.

The main issue seemed to be a misunderstanding of how cryptocurrency networks work, as the current code requires taxpayers to be prepared to pay taxes on funds received via airdrops or forks. Both of these events can grant new tokens or coins to current holders of various digital assets. Hence, the IRS sees that as a taxable event.

However, the issue is, a taxpayer may be required to pay taxes on funds that they are unaware they own. Notably, airdrops and forks can move funds into an investor’s account without their knowledge. In this way, taxpayers would be forced to pay for funds they had no control over.

The letter asked the IRS to offer clarity on the taxability of airdrop and fork events. Next, they asked the IRS to provide clarity on the meaning of “dominion and control” in relation to these funds. In particular, funds received without the taxpayer’s knowledge should not meet a standard of dominion and control. This is a pertinent issue for most taxpayers.

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The letter also pointed out a lack of guidance within the current IRS ruling regarding various crypto-based finance, including futures trading and interest earned from digital asset deposits, as well as all crypto-based income.

Last but not least, the letter asked for decisive action on tax reporting and withholding aspects, such as 1099 form usage, as well as on the topic of retroactive enforcement. Overall, the lack of clarification is concerning, and taxpayers should consult a certified accountant for help.

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