Evan Fox, J.D., LL.M.
10.17.2019 | CryptoLogic
Hello faithful CryptoLogic readers! I know it has been some time since the last edition ran. I trust you have all been well. You may be wondering, “what has prompted a new post?” (or perhaps “Oh! I guess he does still have that job”). Well, the Internal Revenue Service has finally issued some additional detailed guidance involving Virtual Currency, and I would be remiss in not providing you with an update. After all, that IS my job.
The IRS guidance comes in the form of both a revenue ruling (Revenue Ruling 2019-24) and an accompanying frequently asked questions. About half of the FAQ is basic information which was either provided directly in 2014, or was an obvious element of the “Virtual Currency is Property” mandate handed down. For the first time, the IRS has actually spoken directly on the hot topics of (a) hard forks and airdrops and (b) disposed crypto asset basis selections. Nothing on pre-2018 like-kind exchange (1031) transactions (authors note: damn!), but what we got was fairly illuminating nonetheless.
Beginning with RR 2019-24, the IRS sets forth two primary questions and fact patterns regarding hard forks and airdrops:
- Does a taxpayer have gross income under § 61 of the Internal Revenue Code (Code) as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency?
- Does a taxpayer have gross income under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency?
Without much more suspense, the IRS say (1) NO, and (2) YES. In more elaborate terms:
“If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.”1
“If a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you receive that cryptocurrency.” 2
The FAQs go on to further detail the income and basis computations under scenario 2, wherein a taxpayer must report “ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided the taxpayer has dominion and control over the cryptocurrency so that they can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.” The taxpayer’s basis in the airdropped cryptocurrency then becomes “the amount [the taxpayer] included in income on their Federal income tax return.” 3
Another significant issue clarified by the IRS concerns virtual currency unit dispositions when the asset had been acquired at various points at different costs. As outlined in FAQs 36 and 37, a taxpayer may elect to specifically identify the units of a virtual currency that were sold when the virtual currency was acquired at different times and have different basis amounts. However, if specific identification is not done by the taxpayer, the virtual currency is deemed to have been sold, exchanged, or otherwise disposed of on a first in, first out (FIFO) basis.
If this blogish has been of greatish interest to you historically I would recommend giving the full RR 2019-24 and FAQ a read. Neither is very long and will only reinforce the idea that the conservative approach to digital asset taxation (i.e., when in doubt, report) has turned out to be correct thus far, and any new points of uncertainty should be approached in a similar way.
Questions? I am always happy to connect. | Evan Fox at 212.331.7477 or firstname.lastname@example.org
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Evan Fox, J.D., LL.M. is a Berdon tax professional within the Digital Asset Advisory Practice. He advises clients across an array of business sectors on the tax implications of evolving cryptocurrency and blockchain technology.
1 FAQ 21
2 FAQ 22
Note: The thoughts and opinions expressed here should not be taken as investment or financial advice. The goal of CryptoLogic is to educate and enhance interest in the crypto space or a particular asset. It is important that when considering your investment and financial situation, you do your own research and speak with your trusted advisors.