The taxation of cryptocurrencies is undoubtedly one of the biggest problems regulators, bankers and even politicians face with these new-age assets. How to tax cryptocurrencies? Until now, there was almost no specific legislation in most states that would define how to exactly tax not only cryptocurrencies but also forks or airdrops. The American IRS has therefore decided to draw up a completely new law that focuses mainly on these two crypto-specific events.

The Internal Revenue Service has put a spotlight on cryptocurrencies

Even though many crypto enthusiasts and users might not like it, the step IRS has taken regarding the taxation of cryptocurrencies may be viewed positively. It is because it must be clear to everybody that, sooner or later, a stricter intervention by regulators into cryptocurrencies could be expected. A deep aversion to cryptocurrencies can still be felt from their view, especially because it is an unregulated sector with minimum legislation. And that’s why such a step by IRS may help.

Why isn’t it the best news for cryptocurrencies though? Because everything around cryptocurrencies is brand new. Starting from how they function up to how people use them. And that's why nobody can try to fit outmoded principles (whether legal, financial or tax) and believe that a functional system would be created. But this is what IRS attempted. Mainly in the airdrop and fork parts it is now clear that reality is miles away from the ideas of IRS.

Good intention, bad implementation.

The Internal Revenue Society stated that, in the case of any airdrop or fork, the owner of the new cryptocurrency must pay tax on it (as income tax). However, this brings up several problems.

For instance, when owning an Ethereum wallet, the owner may be given ERC-20 tokens as a gift, which he was not even interested in, and still has to pay tax on them. In most cases, this might be a lot higher than the profit itself because, especially in the case of airdrops, we know that the value of the new cryptocurrency tends to drop rapidly immediately after the given event. The tax, however, should be paid for the period when the airdrop was credited to the person and not for the period when he or she sold the cryptocurrency.

Another, although less probable, problem may arise in how it will be defined which cryptocurrency is “newly” created and which is not. The IRS might say that Bitcoin was a fork of the Bitcoin Cash (and not vice versa) and collect a lot more money from taxes. Despite this being an unlikely possibility, it points to the uncertainties and irregularities of the IRS document.

The IRS as a manual for the EU?

What does it mean for the citizens of Slovakia and the EU? Nothing specific so far, since the IRS is the main tax authority in the U.S. It cannot be ruled out, however, that the European Union, and, probably, even Slovakia, will also choose the same or similar legislation. But that will definitely take time since the IRS itself has been working on this draft since 2014.