Despite the wishful thinking of many investors, cryptocurrency transactions are indeed taxable events. This has become a harsh reality for anyone with a Coinbase account, as the IRS has already started its crackdown on users of America’s most popular Bitcoin exchange.
Can Cryptocurrencies Even Be Taxed?
Short answer: yes. In fact, the IRS knew about cryptocurrencies well before most of the rest of us did. The agency issued a policy notice way back in mid-2014 – when a Bitcoin would have cost you only about $500. At the time, the idea of becoming an overnight cryptocurrency millionaire was just a pipe dream. As a result, the IRS pretty much ignored the fact that almost nobody reported virtual currency gains on their taxes. Unfortunately, however, this is no longer the case.
Now that there’s money on the table, the IRS wants its cut. In 2017, the tax agency filed an enforcement action against Coinbase – and it appears to be winning. The federal court presiding over the matter recently ordered Coinbase to hand over the names, birthdates, addresses, and taxpayer ID numbers of the 14,000 highest-volume traders on the exchange between 2013 and 2015. So, if you traded on Coinbase and were not among the mere 800 people who actually disclosed their activity to the IRS, you can expect an audit any day now.
Bitcoin Forks Bring Unintended Tax Consequences
Bitcoin holders love forks because they’re basically free money. Whenever a hard fork occurs on the Bitcoin blockchain, investors holding their coins on compatible exchanges or wallets receive a payout. So, if you owned Bitcoin on August 1, 2017, you would have been credited with an equal amount of Bitcoin Cash when the fork occurred at Block 478558. Now that Bitcoin Cash is worth about $2,500, those free coins have become a pretty significant windfall.
While no fork has yet been able to follow its runaway success, Bitcoin Cash has made quite a few Bitcoin-rich investors a whole lot richer. Bitcoin Cash has increased in value nearly 1000% since its launch just five months ago, reaching a total market cap of over $42 billion at the time of writing this article. After its early victory against Bitcoin traders on Coinbase, however, Bitcoin Cash has left the IRS absolutely frothing for its piece of an increasingly valuable pie.
The IRS has thus far been silent on how it plans to tax Bitcoin forks but rest assured it will figure out how to get its money. Most experts believe that forks will be taxed under the IRS rules regarding constructive receipt of income, which applies when a taxpayer is credited for income that he or she has not actually received yet. So, for example, if you got a paycheck on December 31, 2017, but didn’t cash it until the banks re-opened on January 2, the check would count as constructive income and apply to the 2017 tax year. Under this interpretation of U.S. tax policy, Bitcoin Cash holders received constructive income on August 1, 2017, even though many exchanges – including Coinbase – didn’t actually credit it to user accounts until much later.