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MIT Technology Review

How the hell are cryptocurrency holders supposed to file their taxes?

Though it wasn’t in time for tax day, US lawmakers are pressuring the IRS to clarify its policies for digital currencies.

April 16, 2019

America's cryptocurrency tax policy is confusing everyone—and it’s high time for the US Internal Revenue Service to sort it out and explain. That’s the gist of a strongly worded letter sent by a bipartisan group of 21 members of the House of Representatives to the IRS on April 11.

The legislators, led by Tom Emmer from Minnesota, join a growing chorus of policy advocates calling on the IRS to update the guidance it published in 2014. There remains “substantial ambiguity on a number of important questions about the federal taxation of virtual currencies,” they write. Emmer and his colleagues say there’s an “urgent need” for additional guidance.

At the top of the priority list are open questions around the concept of capital gains, which are profits an investor realizes when selling an investment. The guidance the IRS published five years ago stated that “virtual currency” would be treated as property for federal tax purposes. Buying and holding it is not a taxable event. But if you use your crypto to buy anything—even something like a cup of coffee—you have to make sure you keep track of the difference between the value of the cryptocurrency when you first bought it and when you spent it. If it increased in value, that counts as a capital gain, and you have to pay taxes on it.

But the IRS hasn’t specified exactly how people should determine their cryptocurrency’s value while calculating capital gains. That's problematic, since many digital currencies are listed on multiple exchanges, and prices are not uniform. Emmer and colleagues have asked the IRS to be much more specific.

The lawmakers also raise the issue of hard forks, which occur when a blockchain network decides to split into two, each with its own coin. This may happen if the community around the network becomes irreconcilably divided—for instance, over proposed technical changes. This is why Bitcoin Cash formed, as a fork of Bitcoin, in 2017.

Last year, Bitcoin Cash itself split in two. When a chain splits, holders of the original coin are entitled to the same value of the new coin. Is that income? How exactly is it taxed? The IRS has yet to issue any guidance here.

Though there are “many other open questions,” Emmer and his coauthors say the confusion about crypto capital gains and hard forks is a particularly urgent problem. The letter requests a written response describing the IRS’s plans to provide additional guidance on these issues by May 15. That won’t have helped people scrambling to meet yesterday’s filing deadline, but maybe next year tax season won’t be so much of a headache for crypto users.