The IRS has released the first guidance since 2014 which tells cryptocurrency investors and their tax advisers how to report income from their holdings.
The IRS requires taxpayers to track their crypto transactions to prove how much they bought, so they can determine how much they owe when they sell. An investor also must document transfers of coins between two wallets to prove to the IRS that the transaction is tax-free.
Moreover, the agency provides clarification on how the cost basis can be determined. The cost basis should be calculated by summing up all the money spent to acquire the cryptocurrency, “including fees, commissions, and other acquisition costs in U.S. dollars.”
When selling crypto, taxpayers can identify the coins, “either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units” in a single account or address.
The new guidance allows for ‘first-in, first-out’ accounting, or specifically identifying when the cryptocurrencies being sold were acquired. Further, the guidance addresses the tax liabilities created by cryptocurrency ‘forks’ and by coins received in so-called “airdrops” – distributions of tokens, typically for free.
Finally, cryptocurrency held for less than a year will be taxed at higher short-term capital gains rates, while assets held for more than a year can qualify for lower rates.