IRS Issues New Cryptocurrency Guidance
On Oct. 9, 2019, the Internal Revenue Service (IRS) released revenue ruling (Rev. Rul. 2019-24) and a Frequently Asked Questions (FAQs) document, which provide additional guidance on the tax treatment and reporting obligations for transactions involving virtual currency (also known as cryptocurrency). This guidance supplements the original guidance that was issued in 2014 in the form of a notice (Notice 2014-21), which provides a baseline rule that cryptocurrency is property for federal income tax purposes.
Rev. Rul. 2019-24 addresses questions related to the tax treatment of hard forks. The revenue ruling describes a hard fork as a protocol change that results in a permanent split of a new distributive ledger from a legacy or existing distributed ledger, resulting in the creation of a new cryptocurrency on the new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. The revenue ruling then states that a hard fork may result in the holder of the legacy cryptocurrency receiving new cryptocurrency by means of an airdrop, which is not technically correct in that such holders generally are entitled to receive an amount of the new cryptocurrency equal to the amount they held in the legacy cryptocurrency simply by virtue of holding the legacy cryptocurrency. However, it is clear that the tax treatment of the receipt of the new cryptocurrency will be based on whether the owner of the legacy cryptocurrency is able to take dominion and control over the new cryptocurrency generated as a result of the hard fork. If a taxpayer has immediate dominion and control over the new cryptocurrency, the taxpayer will be required to include in his/her gross income (as ordinary income) an amount that is equal to the fair market value of the new cryptocurrency that was transferred to his/her account/wallet and will take a basis in such new cryptocurrency equal to such fair market value. Owners of an existing cryptocurrency who do not receive dominion and control over the new cryptocurrency at the time of the hard fork (for example, because their wallets may not be compatible to support the new cryptocurrency), will not have income at the time of the hard fork. They presumably would have income when they achieve dominion and control over the new cryptocurrency, although this is not specifically stated.
The FAQs document generally addresses questions related to cryptocurrency transactions for those who hold cryptocurrency as a capital asset. It provides, as a general rule, that taxpayers will recognize gain or loss when they sell cryptocurrency for fiat currency. Gain or loss will also be recognized by a taxpayer who pays someone with cryptocurrency for providing services (the payor generally will recognize capital gain or loss equal to the difference between his or her basis in the cryptocurrency and the value of the services received, and recipient will recognize ordinary income equal to the value of the cryptocurrency received). The FAQs document also provides answers to several other questions, including the tax treatment and reporting of any gain or loss arising from the exchange of cryptocurrency for other property (or vice versa), the determination of basis and fair market value, the tax implications of peer-to-peer cryptocurrency transactions, exemption for soft forks and bona fide cryptocurrency gift, etc.