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Reporting Cryptocurrency Gains and Hard Forks

Due to the inherent structure of cryptocurrency trading most users consider their transactions completely anonymous. The Internal Revenue Service (“IRS”) estimates three million individuals transact in cryptocurrency each year. However, only about 800 to 900 people disclose the capital gains on their Federal Income Tax Returns.

Due to the lack of disclosure, in November of 2016 the IRS obtained an order from the Northern District of California authorizing them to serve a John Doe Summons (“The Summons”) on Coinbase, Inc. (“Coinbase”). At that time, Coinbase had facilitated an estimated six billion dollars in cryptocurrency trading.

Much to the enjoyment of cryptocurrency holders and Coinbase users everywhere, Coinbase refused to comply with The Summons. However, in November of 2017, the IRS filed a Request for Enforcement which was granted by the court. Meaning, Coinbase was forced to disclose to the IRS who was transacting in cryptocurrencies from 2013 through 2015.

How to Report

To date, cryptocurrency trading platforms such as Coinbase, Coinsquare, Kraken, Cex.io, ShapeShift, and Poloniex rarely, if ever, provide a Form 1099 to their customers. A Form 1099 displays capital gains and losses, and the holding periods of capital assets, such as cryptocurrencies. In turn, taxpayers use Form 1099 to disclose their capital gains on Form 8949 of their Federal Tax Return.

Without a Form 1099, the trader must reconstruct their capital gains, holding periods, and reporting requirements. To do so requires an intimate understanding of inventory methods, income tax reporting periods, and the ability to fill out multiple federal tax forms.

Not only is the thought of looking through every trade you conducted over the last five years enough to make your head spin, the application of inventory methods needed to accurately report your gains and losses is enough to pull your hair out. Fortunately for your sanity and hair, tax attorneys at Rosenberg Martin Greenberg, LLP can help you accurately report your cryptocurrency transactions.

Hard Forks

If you’re reading this you most likely know what a Hard Fork is (no, not the kind you eat with), but for those who are not as familiar with cryptocurrency lingo let me share some of my knowledge. A Hard Fork is a deliberate introduction of a new blockchain. For each successful Hard Fork those who held the cryptocurrency in question at the time of the split will be given an equal number of new coins.

For example, Bitcoin (BTC) holders incurred a Hard Fork in August of 2017. Immediately after the Hard Fork, BTC holders received an equal number of Bitcoin Cash (BCH), a completely separate and distinct cryptocurrency. The newly received shares of BCH have value unrelated to their BTC counterpart, and that value is reportable on Federal and State Income Tax Returns.

To date, the IRS has published little to no guidance on this subject. As a result, tax practitioners are forced to analogize a Hard Fork to transactions we have already seen in the marketplace. Further, valuation of the new coins can be tricky because there are multiple dates that can be used when determining whether an individual has control.

If the foregoing information applies to you, or you just want to discuss cryptocurrency with someone who loves financial transactions please give us a call at 410.649.4991 or email at mmarch@rosenbergmartin.com. We look forward to hearing from you.

Rosenberg Martin Greenberg

25 South Charles Street, 21st Floor MD 21201
Phone: 410-727-6600
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Rosenberg Martin Greenberg

705 Melvin Avenue Annapolis, MD 21401
Phone: 410-727-6600
Map & Directions