Reporting XCH earned during testnet to IRS

General Chia Discussion
1

Anyone that started farming XCH before it went mainnet (residing in US)? How would one report those early XCH (as there was no price set on it before the mainnet started).

2

I don’t know about the IRS, but in the UK they would normally be reported as ‘gifted’ (airdropped ?) and be allocated a zero value if there was no value at the point of receipt.

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3

Thank you. Maybe the IRS also have a zero-value gift concept. I will try to dig for more info based on that.

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4

If you didn’t report them as income years ago, I would just assume they have a $0 basis now, so you’ll pay long term cap gains on 100% of whatever you sell them for. (Not a Lawyer or an Accountant)

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5

Thanks for the info. It is about a different coin that is not yet out, or rather more general about coins earned during the testnet periods (zero value and all distributed during the coin genesis, meaning earned at $0 during the testnet).

6

There is some info here. Koinly is what I use for my tax calculations and I wouldn’t be without it:

https://koinly.io/blog/crypto-airdrop-tax/#:~:text=The%20IRS%20guidance%20is%20clear,on%20Form%201040%20Schedule%201.

It’s seems the IRS, similar to the UK (HMRC) have a concept of ‘fair market value’ (FMV). Although the above article covers airdrops, I would say it should be easy to cover FMV of {not a lot} for testnet coins, which by definition almost exclusively cannot be traded on exchanges.

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7

Thank you for the link. That FMV value is the part that I don’t know how IRS is handling.

My (uneducated) guess is that the IRS is handling all crypto taxes the way UK is handling it for “traders” (we always need to pay the year we received it). Here is an article that talks about it (IRS Guidance On Cryptocurrency Mining Taxes).

I also think (again, uneducated guess) that the IRS doesn’t recognize FMV at $0 for crypto. I mean, I have not seen anything that would talk about FVM at $0, as such I have no clue about it.

I really don’t know whether @luckidog example would work or not (guess, if the IRS estimates the “damage” at $50, they will just ask for it; however, if they asses it at $10k, they may be more incentivized to go after such case to further assess “late fees”, as someone will be able to put it on their quarterly report). Really, don’t know.

Edit:
Actually, the page you provided had a link to US specific taxing (https://koinly.io/cryptocurrency-taxes/). Under “Cryptocurrency tax breaks” they mention crypto tax break for gifts (up to $17k). Maybe somehow this can be used for the pre-mainnet coins.

They also provide an email address to crypto-accountants. I will write to them asking about it.

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8

Not tax or legal advice, but when it was not sellable, it is a $0 asset cost-basis on the books IMO. I am preparing to study more tax law to dig into the trenches on this issue I’m passionate about. Consult your own CPA who will certainly have differing opinions.

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9

This sounds like a similar scheme to the UK too - an individual can ‘gift’ crypto assets to their spouse*, if you have one, and that transfer of assets is not classed as a disposal, so does not attract taxation (up to that limit per year of course). My understanding following this is that as your spouse disposes of (sells) them, they are classed as a capital gain, with the cost basis being zero when they received them (so all a capital gain, minus their annual capital gain allowance).

As @bwfree stated, it seems the rules on crypto and taxation are still evolving and interpretation is involved, with differing opinions on what can/should be done.

However, it seems to me that as both the US/UK are typically fairly well aligned, they are aiming to treat them similarly if not identically to any other asset (stocks/shares for example).

  • In the UK at least, your spouse is someone you are married to or are in a legal civil partnership with. i.e. not your girlfriend/boyfriend.
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10

Just on this aspect, I suspect it might be the other way round. If you acquired coins in a tax year at zero cost (testnet mined being a great example) and the following year sold them for $1k per coin, you’d potentially have a sizeable capital gain with taxes due. To reduce this tax you’d might be tempted to argue the coins were worth $500 each when you received them during testnet, but you’d probably have a hard time doing so as they would not have been listed on exchanges etc at that time. You could lie of course, but that usually doesn’t end well… :smile:

I’d have thought attributing a zero value when mined during testnet is perfectly acceptable and provable. This would result in a potentially higher capital gain tax burden when disposed of, but of course a zero tax burden at point of mining (due to zero value at that time).

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11

In the US - if your claim was that the coins were worth $250 when minting, you’d declare that as income in the year they were minted, pay tax on them at your marginal tax rate. When you later sell at $1k, you’ll pay capital gains on the $750 of gains (from the basis of $250) - that will be short term (your marginal rate) or long term (preferable fixed rate) depending on if you’ve held them for a year or not.

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12

I got a reply from those crypto accountants. They want GBP 250 for the initial session, where they didn’t commit that they will have any answers. So, I will pass on it.

Sorry, looks like I didn’t write it right. What I meant to say is that conditions are identical for both cases (same price, etc.) and the only difference is that guy A sold 5 coins and the guy B sold 1k coins (both at $10 with the same basis). The rest follows what @luckidog described.

@luckidog we are in agreement.

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13

Yes, that’s how it is in the UK too.

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