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The IRS recently issued new cryptocurrency guidance and is intensifying its efforts to identify taxpayers who bought or sold cryptocurrency and didn’t report it on their tax return. The following is a brief overview of the clarifications made.
What is the tax treatment of Cryptocurrency transactions?
For tax purposes, cryptocurrency is treated as property.
Unless you are a trader, for tax purposes, cryptocurrency is treated as a capital asset. Therefore, taxes are paid on gains and losses are subject to the capital loss limitation rules.
In the cryptocurrency world, a hard fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of hard forks:
The IRS has ruled that:
When selling property, it is generally sold on a first-in, first-out (FIFO) basis unless the seller is eligible to use the specific identification method. The specific identification method is preferred because the seller has control over the amount of gain or loss the sale will generate. With FIFO, the seller does not have a choice.
To use the specific identification method, the seller has to either:
This information must show:
We encourage you to read the IRS’s Frequently Asked Questions on Virtual Currency Transactions to learn more about complying with the reporting requirements.
Do not hesitate to reach out to your Beaird Harris advisor to discuss your specific situation.
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