By Jake Benson, CEO, Lukka Inc.
The IRS has released its much-awaited guidance on Virtual Currency Transactions in its Notice 2014-21, 2014-16 I.R.B. 938 (PDF) and FAQ. This follows the last notice, issued back in 2014. Key differences in the guidance that Lukka experts have identified focus on increased specificity and clarity in the following areas:
Fair Market Value (FMV):
Unsurprisingly, the application of Fair Market Value (FMV) for the valuation of crypto assets is reinforced throughout the notice. Clarity has emerged around the specific circumstances in which FMV is applied as well as how to treat transactions with crypto assets when no clear FMV exists.
Establishing Fair Market Value for crypto assets is challenging, which is why Lukka introduced its Lukka Prime product.
Taxable Income on Hard Forks:
Existing cryptocurrency that undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger (Hard Fork), or some other transfer resulting in no new cryptocurrency, is not taxable income.
Taxable Income on Airdrops:
Distributions of new cryptocurrency to multiple taxpayers’ distributed ledger addresses (Airdrops) only becomes taxable income at the point at which the recipient takes control over the cryptocurrency so that it can be transferred, sold, exchanged, or otherwise disposed.
Methods to Allocate Disposals:
The IRS has acknowledged that investors may specifically track acquisition lots and account for disposals with any method as long as the cost basis and lot identifiers are recorded (either with IDs from the blockchain, or with proprietary identifiers). If specific identification is not recorded, then investors should account for disposals with a first-in-first-out (FIFO) methodology.
This clarity is extremely beneficial to investors and resolves some previous uncertainty on this topic. Using specific identification allows investors to optimize their reportable gains and losses from a tax perspective.
Lukka’s calculation engine supports complex lot tracking as well as scenario comparisons for alternative cost basis methodologies.
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