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December 20, 2019

The IRS recently issued new cryptocurrency guidance and is hot on your trail if you bought and sold cryptocurrency and didn’t report it on your tax return.

Here are the tax basics. You’ll treat cryptocurrency as property for tax purposes.

Cryptocurrency is a capital asset (provided you aren’t a trader). Therefore,

 

Forks

In the cryptocurrency world, a fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of forks:

The IRS ruled that

For Example:  You own J, a cryptocurrency. A fork occurs and you receive three units of K, a new cryptocurrency. At the time of the fork, K has a value of $20 per unit. You’ll recognize $60 of ordinary income due to the fork.

 

Specific Identification

When selling property, you generally sell it on a first-in, first-out (FIFO) basis, unless you are eligible to use the specific identification method. You want to use the specific identification method if you can because you can select the amount of gain or loss your sale will create. With FIFO, you have no choice.

To use the specific identification method, you’ll have to either

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