New IRS Crypto Guidance Causes More Confusion

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The Inland Revenue Service (IRS) has issued its first set of tax guidelines for cryptocurrency investors in five years, three months after saying it would, in an attempt to offer clarity on a number of issues that investors had been struggling to work around since the last set of guidelines in 2014. The two new pieces of guidance are intended to address “common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork”, although the new material in fact has the potential to cause more confusion for those not versed in the language of accountancy.

The IRS “Wants to Help”. Really?

The IRS’s new guidelines seem, if one were to go just by the accompanying announcement, to fill in some important gaps that were making life hard for cryptocurrency investors when it came to tax time, as detailed by IRS Commissioner Chuck Rettig:

The IRS is committed to helping taxpayers understand their tax obligations in this emerging area. The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.

However, for an agency “committed to helping taxpayer understand their tax obligations”, the additional material is written in a complex, borderline legal way, that only someone versed in accountancy practices would be able to fully comprehend, and indeed leaves the door open for misinterpretation by the casual investor. The document goes through various scenarios in relation to crypto forks and includes sentences such as:

Section 1011 of the Code provides that a taxpayer’s adjusted basis for determining the gain or loss from the sale or exchange of property is the cost or other basis determined under § 1012 of the Code, adjusted to the extent provided under § 1016 of the Code.

The fact is that very few casual crypto traders are going to understand what that kind of terminology means to them and how they can apply it to their personal situation, with only those who can lean on lawyers or accountants being able to understand the ‘clarification’. This doesn’t help the thousands of people who have received letters asking for clarification on their crypto income, or those looking to file future accounts.

Twitter Explains

Fortunately, Twitter was able to come to the rescue of the average Joe and offer an explanation of the new guidelines, with Blockchain president and Chief Legal Officer Marco Santori on hand to offer a rundown. His take included some worrying observations, like the IRS confusing forks with airdrops and their belief that forks could lead to no coins being received. In summary, he decided that the IRS “got the principles right” but “didn’t tackle anything new or interesting”. And so the wait for genuine clarity on crypto tax continues…