🚨 BREAKING 🚨
1/ IRS releases long-awaited guidance on crypto forks and airdrops.
It is not good.
Begin thread send tweet 👇
1/ IRS releases long-awaited guidance on crypto forks and airdrops.
It is not good.
Begin thread send tweet 👇
2/ The new guidance covers two circumstances: airdropped coins and forked coins. Sadly, it seems to confuse the two, assuming that airdrops and forks often occur at the same time or are otherwise functionally related.
3/ First, IRS says "If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency", then no tax due. Wait, what?
4/ If there was hard fork at all relevant to "your" crypto, then under what circumstances would you not "receive" crypto?
If you have the keys, or a third party has the keys and you can direct the third party, you've "received" them.
If you can't, then why care about the fork?
If you have the keys, or a third party has the keys and you can direct the third party, you've "received" them.
If you can't, then why care about the fork?
5/ In fact, IRS says there's no taxable income so long as the forked coin "is not airdropped or otherwise transferred to an account owned or controlled by" the taxpayer. Hrm. This raises even more questions, like:
6/ ...
Why would forked coins get airdropped post-fork?
If they were, who would do the airdropping?
Why would they be airdropped to an "account" owned or controlled by the recipient?
What could the airdrop have to do with the fork?
Why would forked coins get airdropped post-fork?
If they were, who would do the airdropping?
Why would they be airdropped to an "account" owned or controlled by the recipient?
What could the airdrop have to do with the fork?
7/ To be sure, forks have occurred where the new chain was not supported by some particular custodian. The custodian's customer does not know the keys. They owned the original coins but will not "receive" the forked coins until or unless the custodian supports the new chain
8/ That's one scenario where the guidance provides clarity to the customer.
...but what about the custodian?
...but what about the custodian?
9/ Surely it follows that forked coins must then be *taxable income* to the custodian, who knows the private keys to both the original coins and the forked coins, even though it never owned them. Fascinating consequences here.
10/ But what of this subsequent airdrop envisioned by IRS? One theory is that they view the custodian's subsequent support of a new chain, and its making the forked coins available to the customer to be... an "airdrop"?
11/ That could fit the facts.
But what does it have to do with airdrops as we know them to be in the real world?
But what does it have to do with airdrops as we know them to be in the real world?
12/ Sadly, very little. It is largely uncontroversial that an airdrop is, under most circumstances, an accession to wealth, and therefore taxable in the US.
13/ The bleak reality is likely that IRS drafted this guidance with a purely custodial mindset. It assumes that we all have accounts with custodians that hold our crypto for us.
14/ As such, this guidance gives answers we already knew:
Q: If an exchange credits new crypto to my account, is that taxable?
A: Well yeah, of course.
Q: If an exchange *doesn't* credit new crypto to my account, is that taxable?
A: What? No of course not. How could it be??
Q: If an exchange credits new crypto to my account, is that taxable?
A: Well yeah, of course.
Q: If an exchange *doesn't* credit new crypto to my account, is that taxable?
A: What? No of course not. How could it be??
15/ So what really happened here? On balance the guidance isn't that controversial:
1) IRS got the principles right.
2) IRS didn't tackle anything new or interesting
3) IRS just got the terminology wrong (forgivable!)
1) IRS got the principles right.
2) IRS didn't tackle anything new or interesting
3) IRS just got the terminology wrong (forgivable!)
16/ Under this interpretation, there basic question is still open:
17/ If I have self-custodied coins, and the chain forks, creating new coins, but I do anything to access the new coins are the new coins taxable income?
~or~
"Have I exercised dominion and control sufficient to characterize the new coins as an accession to wealth"?
~or~
"Have I exercised dominion and control sufficient to characterize the new coins as an accession to wealth"?
18/ If you're cynical, then you think this guidance is saying, simply, Yes.
If you give IRS the benefit of the doubt, then we don't yet know the answer to this question.
If you give IRS the benefit of the doubt, then we don't yet know the answer to this question.
19/ Me? I'm not a tax lawyer (hah! and you still read 18 of my tweets...) but I do think it's patently unfair to force individuals to liquidate hard-to-liquidate coins just to pay taxes on income they never had control over receiving and is probably not worth all that much anyway
20/ Matt put it better:
21/ Ahem please don't rely on the above as legal advice. It would be some of my worst, I'm sure. Instead, check out the source material and tell me what you think! irs.gov/newsroom/frequ…
