Taxation in the crypto space is one of the most debated issues among regulators worldwide.
The United States Internal Revenue Service (IRS), in its 2020 tax guidance draft, discussed details of proposed cryptocurrency taxation.
Prior to this, the U.S. IRS distributed its main taxation form 1040 to over 150 million people. They were expected to indicate if they have sold, exchanged, received, or acquired crypto through other means. This form will essentially point out taxable crypto holdings among cryptocurrency investors.
Airdrops and hard forks
According to the draft, respondents must answer in the affirmative if they at any time received any crypto for free. This also applies to free tokens gotten from a hard fork or airdrops.
Airdrops, in simple terms, are specified amounts of cryptocurrencies distributed to potential users of a particular crypto. They help create awareness and subsequently boost adoption for crypto gearing to go live. Airdrops are usually free.
Hard forks, on the other hand, are updates made to a particular cryptocurrency blockchain. They usually require already existing users to upgrade to the new version. Most times, it results in the splitting up of the blockchain into two different chains with different tokens. When a hard fork occurs, users’ previous tokens are usually replaced by new tokens. They, therefore, receive the same amount of their token holdings on the new chain.
The draft disclosed that all such holdings gotten from hard forks or airdrops are taxable. Therefore, respondents are expected to tick the “YES” box.
However, all crypto holdings and transfers between wallets owned by the same person are not taxable. According to the draft, the taxpayer does not need to tick the “YES” box for all such holdings and transfers.
The U.S. IRS furthermore disclosed that there is a high chance this draft will be effected as law. This can only be upturned if new legislation is formed or in the event of unusual circumstances.
The crypto space has faced a lot of scrutiny and hostility from regulators worldwide. As cryptocurrency is beginning to gain acceptance around the globe, there is also a corresponding clamor for regulations. Many countries like South Korea and Brazil have also disclosed plans to enact crypto taxation regulations.
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