What to Expect When the IRS Alters Its Bitcoin Tax Policy

Coming guidance from the IRS will address longstanding questions about the tax treatment of cryptocurrency.

The industry is also hoping for clarity on a number of other matters, including the tax implications of airdrops, staking and crypto stored at overseas exchanges.

The American Institute of Certified Public Accountants has suggested that taxpayers should be allowed to use the average rate of the day and the average price of different exchanges to calculate the value of their crypto, as well as aggregating indexes like CoinDesk's Bitcoin Price Index.

"Taxpayers may have one method applied to one wallet and another method applied to another exchange when determining the fair value of all the bitcoin transactions," the comment says.

Users should be allowed to use "Either the exchange rate data from one exchange, averaged exchange rate data from a fixed set of exchanges, or a third-party exchange rate index" for each cryptocurrency, as long as they use these methods consistently, Foust wrote.

Imagine somebody who earlier mined some bitcoin is trying to cash out another coin which cannot be sold for fiat, and so would have to sell it for bitcoin and then sell that bitcoin for fiat.

"If a taxpayer holds their cryptocurrency with a custodial exchange, any actions that the exchange takes regarding airdropped or forked tokens should not affect the taxpayer unless such actions were undertaken at the direction of the taxpayer."

The document, submitted to the IRS in March 2018, proposed that "Taxpayers who owned a coin that was subject to a Hard Fork in 2017 would be treated as having realized the forked coin resulting from the Hard Fork in a taxable event" and the value of a new coin should be zero.

Forks can be treated by analogy with traditional financial and business events, Zarlenga said, and it depends which analogy the IRS will see as more appropriate: possible options include events that currently don't have tax consequences, like a stock split or a cow giving birth to a calf, but also taxable events like getting free samples and using them, finding property or earning dividends on a property.

Three of the issues discussed above - cost basis calculation, cost basis assignment, and forks - are explicitly mentioned in Rettig's letter to Emmer, but there are several others that crypto tax experts hope the upcoming IRS guidance will address.