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IRS and FinCEN clarify cryptocurrency reporting rules: Like-Kind Exchanges, Specific ID, FBAR, and Airdrops

Last Updated: November 16, 2019

On November 13, 2019, IRS and FinCEN officials clarified cryptocurrency reporting requirements at the AICPA National tax conference in Washington, DC. The panel included several key individuals in the crypto compliance space:

  • Suzanne Sinno (General Attorney, IRS’s office of Chief Counsel, primary author of Rev. Rul. 2019-24)
  • Christopher Wrobel (Special Counsel to the Associate Chief Counsel, IRS)
  • Carole House (Cyber and Emerging Tech Policy Specialist, FInancial Crimes Enforcement Network)

Like-Kind Exchange

The IRS officials clarified that the cryptocurrency FAQs issued on October 9, 2019 were clarifications of the original cryptocurrency tax guidance (Notice 2014-21) and apply retroactively. Therefore, in the eyes of the IRS, taxpayers should have already been following the “new” guidance since the issuance of the original notice in 2014.

Suzanne Sinno further clarified that like-kind exchanges (which were explicitly disallowed for cryptocurrency after January 1, 2018) were actually never allowed in the first place. Like-kind exchange treatment allows a taxpayer to defer capital gains on real property-to-property transactions. Therefore, technically, the IRS can take action on historical tax returns which assumed like kind exchange treatment for crypto-to-crypto trades.

Update: On November 15, 2019, Christopher Wrobel walked back Suzanne Sinno's comments from two days earlier and stated that while like-kind exchanges are disallowed for cryptocurrency starting in 2018, for pre-2018 transactions, they are still a grey area that will be decided on a case-by-case basis.

Note: A pre-2018 like-kind exchange allocation would still have required filing a Section 1031 IRS Form 8824 for every single crypto-to-crypto trade in order to even potentially be in compliance with tax rules. If you failed to do this, you can amend your tax return.

Specific Identification

The recent tax FAQs by the IRS  indicated that first-in first-out (FIFO) is the default method to account for cryptocurrency disposals, though specific identification is also allowed if:

“A37.  You may identify a specific unit of virtual currency either 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.  This information must show (1) the date and time each unit was acquired, (2) your 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.”

Suzanne Sinno (IRS) confirmed that this allows for highest-in first-out (HIFO), last-in first-out (LIFO), and other types of specific identification accounting, including fungible assets from exchanges, as long as criteria #1 – #4 are met. Again, this also applies retroactively to historically disposed assets because the new FAQs are simply a clarification of previously released crypto tax guidance.

Foreign Reporting (FBAR)

Finally, Carole House (FinCEN) confirmed that cryptocurrencies held in overseas exchanges are NOT required to be reported under FinCEN 114 (FBAR). Foreign reporting on IRS Form 8938 (FATCA) is still not confirmed as to whether it is required or not for cryptocurrency so as best practice, we recommend those who fall into FATCA thresholds to file on their crypto.

Airdrops

Christopher Wrobel (IRS) also added that the recent FAQs from the IRS around airdrops are only intended to cover new coins after a hard fork. This means the question of whether true airdrops (e.g. random coins received for marketing purposes) are still in a grey area of whether they are taxable income or not.

Tax laws are continuously changing, especially in the rapidly developing cryptocurrency space. To stay up to date on the latest, follow CoinTracker on Twitter @cointracker.


Disclaimer: this article is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.

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