Eight members of Congress have asked the Internal Revenue Service (IRS) to clarify its position on cryptocurrency taxation. A recent letter to the agency details the issues facing the taxation of cryptocurrencies, and the lack of clarity in the current policy.
The main issue at hand appears to be a misunderstanding of how digital currency networks work. This is highlighted in the IRS taxation code for airdrops and forksIn the crypto world; a ‘fork’ is essentially a change in the protocol of a blockchain. Since cryptocurrencies run on... More, which both create taxable events in the current plan.
The current code requires taxpayers to be prepared to pay taxes on funds received through airdrops or forks. Both of these events can grant new tokens or coins to current holders of various digital assets. The IRS sees this as a taxable event.
The issue at hand, however, is that a taxpayer may be required to pay taxes on funds that they are unaware they even own. Airdrops and forks can move funds into an investor’s account without their knowledge. In this way, taxpayers would be forced to pay on funds they had no dominion or control over.
The letter asks the IRS to bring clarity to the current code issues that cryptocurrency owners are facing:
- First, they ask the IRS to offer clarity on the taxability of airdropCrypto is a rapidly expanding space and new ways to distribute tokens are continually being developed. Airdrops are used by... More and fork events.
- Second, they ask that the IRS 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.
- Third, the letter asks the IRS to clarify its intent to pursue taxes on these events, retroactively. In other words, will these types of events require taxpayers to pay on previous airdrop and fork events?
- Finally, the letter appeals to the IRS to offer safety from tax penalties for those caught off guard. Should a taxpayer be making good faith efforts toward paying taxes, changes in guidance on payment should not trigger tax penalties.
Of particular note, the members of Congress see that these types of taxable events can be continually shifted. For cryptocurrency investors, changes in the tax code that function retroactively could be major financial events.
Further, with the code shifting, many would find themselves struggling to keep up with the guidelines. With airdrops and forks, the funds may not even be known. Overall, the lack of clarity is concerning, and taxpayers should consult a certified accountant for help.
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