The IRS Has Yet to Update Tax Implication on Crypto Trading

Unfortunately, the IRS has not specified how you should determine this profit and loss value on crypto trading. For example, is it first in first out? This is problematic, since many cryptocurrencies are listed on multiple exchanges, and prices are not uniform. Congress sees a need for the IRS to be more specific. For example, if you buy bitcoin on XYZ exchange, that should be the exchange that you use to value your digital currency transaction. As you can imagine, asking individuals to keep track of the price where on the exchange of initial record is difficult and there is no way for the IRS to confirm this there is no specific time that you are supposed to mark as your closing price.

The lawmakers also raised an issue surrounding a split in an exchange into two different coins. For example, Bitcoin cash was created from Bitcoin when the community around the networks became divided over specific technical changes. When this happens, how is the coin valued?  The IRS will need to do a deep dive into this issue as cryptocurrencies become more mainstream.  Bitcoin Cash itself split into two in 2018. When a chain splits, holders of the original coin are entitled to the same value of the new coin. Is that capital gains or income and how should it be taxed?

The confusion about how to tax cryptocurrencies is an urgent problem. It goes deeper than determining the capital gains tax or splits in coins. Current digital currencies are looked at a property, as opposed to futures or over the counter products which have a mark to market tax scenario. The letter from lawmakers requests a written response describing the IRS’s plans to provide additional guidance on these issues by May 15. This is unlikely to occur.

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