I'm going to focus on two tax provisions of the Infrastructure and Jobs Act that I expect will have the broadest impact.
The IRS is very concerned that taxpayers aren’t properly reporting their transactions for Bitcoin and other virtual currencies. Previously, guidance was issued in Notice 2014-21. Now it has released additional guidance about this subject.
In Revenue Ruling 2019-24, the IRS discusses “hard forks”. A hard fork is like a spinoff for a stock. New cryptocurrency is created on a new distributed ledger. According to the Revenue Ruling, if the new currency is “airdropped” to a distributed ledger address owned by the taxpayer, it is an accession to wealth that is taxable as ordinary income equal to the fair market value of the currency received. If the new ledger isn’t owned by the owner of the base currency, no taxable income results for that individual.
The IRS has also issued additional Frequently Asked Questions about virtual currency at its website. Here is a link to the FAQ. https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
One of the FAQ items relates to virtual currency received in exchange for performing services. The answer provided is that virtual currency received in exchange for performing services is taxable as ordinary compensation income, based on the fair market value of the currency received.
Another FAQ makes it clear that virtual currency transactions can be reported using the specific identification method. The taxpayer must specifically identify the batch of units sold and when they were acquired. A unit of virtual currency can be identified 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 of a specific virtual currency, such as Bitcoin, held in a single account, wallet or address. The information must show.
1. The date and time each unit was acquired,
2. The taxpayer’s basis and the fair market value of each unit at the time it was acquired,
3. The date and time each unit was sold, exchanged, or otherwise disposed of, and
4. The fair market value of each unit when sold, exchanged or disposed of, and the amount of money or the value of property received for each unit.
Taxpayers who don’t specifically identify units of virtual currency that are sold, exchanged or otherwise disposed of are deemed to have sold the units on a first-in, first-out basis.
Transactions other than ordinary income transactions should be reported on Schedule D and Form 8949.
I recommend that taxpayers who participate in virtual currency transactions should get professional help when preparing their income tax returns.