Navigate Cryptocurrency Legislation changes using CCH Axcess iQ

The IRS has released additional guidance in relation to virtual currency and cryptocurrency legislation. Few clients have experience in this area, especially in terms of how they are affected and what exactly should be included in their Federal tax return. The guidance addresses questions by taxpayers and tax practitioners regarding the timing of income recognition, tax basis and definitions and terms in cryptocurrency transactions. The IRS guidance also explains when to use a cryptocurrency transaction to trigger income recognition.

Cryptocurrency is a type of virtual currency using cryptography to secure transactions digitally recorded on a distributed ledger such as blockchain. Virtual currency is treated as property, and tax principles applying to property transactions apply.

Guidance on virtual currency terminology

Specifically, the IRS has given guidance on terms “hard fork,” “airdrop,” as well as the receipt of income to the taxpayer.

  • Hard fork is unique to distributed ledger technology and occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger. A hard fork may result in the creation of a new cryptocurrency on a new distributed ledger in addition to legacy cryptocurrency on the legacy distributed ledger
  • Airdrop is a means of distributing units of cryptocurrency to the distributed ledger addresses of multiple taxpayers. A hard fork followed by an airdrop results in the distribution of units of the new cryptocurrency to addresses containing legacy cryptocurrency.

Many taxpayers incorrectly report, under-report, or fail to report virtual currency when paying property tax. Even the most well-versed in tax law may generally have much more to discuss with clients as the IRS has provided guidance on terms “hard fork”, “airdrop” and how it relates to distributed ledger technology.

More than 10,000 cryptocurrency holders may be at risk or out of compliance due to the IRS motion to enforce tax laws as it relates to cryptocurrency and virtual currency. Have you reported cryptocurrency exchanges on your own tax returns?

Cryptocurrency is a good opportunity to start a conversation with your clients now!

The Wolters Kluwer predictive analytics product, CCH Axcess iQ helps solidify compliance with your client base. CCH Axcess iQ helps create revenue for your firm by providing valuable data to use during client engagements. For example, the new CCH Axcess iQ tax event about cryptocurrency legislation helps firm connect with those clients affected.

Firms are shifting from commoditized compliance services to advisory services. Implementing CCH Axcess iQ creates efficiency by providing an impactful list of events along with affected clients. See the full potential of the predictive intelligence provided by CCH Axcess iQ. Contact a Solutions Consultant or register for a demonstration today.  

AUTHOR

Alexa Crusinberry

All stories by: Alexa Crusinberry