Do you have to declare your cryptocurrencies transactions to the IRS?
2021 was a historic year for cryptocurrency, with many seeing major gains in their holdings. What information will need to be reported to the IRS?
This year after cryptocurrency markets exploded in popularity after record setting gains in value (which have since decreased) many will need to report their gains to the Internal Revenue Service (IRS).
Since 2014, the IRS has had rules on the books on how tax payers report income from "virtual currency" defined as "a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange."
Is cryptocurrency considered a virtual currency?
For the agency these currencies, which could take the forms of digital currency or crypto, can also have a convertible value that could substitute for real currency.
Cryptocurrencies are considered property when a person is reporting their total assets to the IRS. The difference between crypto and other digital currencies is that it "uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain."
What cryptocurrency transactions will need to be reported to the IRS?
Like other assets, like stocks, gains from cryptocurrency will need to be reported when the asset is sold.
"When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses," reads a FAQ from the IRS.
What is a hard fork and how does it impact tax filing?
A hard fork when it comes to cryptocurrency refers to a situation wherein a "cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger." As seen above the ledger is what maintains a record of all transactions, so the fork implies that there will be two ledgers that hold information about the same transaction.
This is known as a "hard fork" and unless you received "any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income."
Calculating income from a hard fork
Sometimes, an airdrop follows a hard fork, meaning that one will have the "ordinary income equal to the fair market value of the new cryptocurrency when it is received." When the transaction is received that is recorded in the ledger and if you have " dominion and control over the cryptocurrency," you will then be able to use the market value distributed to either "transfer, sell, exchange, or otherwise dispose of the cryptocurrency."