On October 9, 2019, IRS released Revenue Ruling 2019-24, 2019-44 IRB 1,1 which provides new guidance on the Service’s handling of cryptocurrencies and is the first of such guidance to be released since March 2014 when IRS issued Notice 2014-21.2 The ruling was issued after prodding from a bipartisan congressional coalition.3 The ruling, and attached Frequently Asked Questions (“FAQs”),4 address three issues identified by members of Congress as being in “urgent need” of IRS clarification:5 (i) provide some clarity as to IRS’ taxation of cryptocurrency forks and detail methods for (ii) calculating and (iii) assigning cost basis. When announcing the revenue ruling’s release, IRS Commissioner Chuck Rettig stated that “IRS is committed to helping taxpayers understand their tax obligations in this emerging area,” and that “the new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment.”6
Revenue Ruling 2019-24, 2019-44 IRB 1 (“Crypto Ruling” or “Ruling”) explains that a hard fork occurs when a cryptocurrency updates its protocol to permanently divert from the existing distributed ledger.7 Hard forks can be used to create a new cryptocurrency on a new distributed ledger, that exists in addition to the preexisting ledger. After a hard fork has been implemented, fork creators will sometimes initiate an airdrop and provide units of the new cryptocurrency to addresses owning the pre-existing cryptocurrency. Recipients of the airdrop have both the new cryptocurrency as well as the pre-existing cryptocurrency.
Crypto Ruling Clarifies Airdropped Currency Created by Hard Forks is Taxable Gross Income
Before the publication of the Crypto Ruling, it was unclear whether cryptocurrency airdropped after a hard fork would be considered taxable gross income under Internal Revenue Code Section 61. However, the Ruling makes clear that new cryptocurrency airdropped after the creation of a hard fork becomes taxable once a taxpayer is capable of exercising dominion over the new cryptocurrency. The Ruling defines dominion as having “the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency.”8 The Ruling goes on to establish that, if a taxpayer can exercise dominion over the new airdropped currency, the airdropped currency will be taxed as gross income pursuant to Section 61, with its basis being its market value at the time the taxpayer established dominion over the new currency.9
FAQs Detail Methods for Calculating and Assigning Cost Basis, and More
The FAQs10 provides 43 responses to questions related to the taxation of cryptocurrencies, ranging from the calculation of basis to the determination of the fair market value. The FAQs apply more broadly than the Ruling, in that they apply to all cryptocurrency, as opposed to cryptocurrency received by airdrop after a hard fork. The FAQs underline that IRS is applying traditional principles of taxation to what many consider a new form of property: the bases for many of these answers are publications previously published by IRS that have no specific references to cryptocurrency.
Author: Isabelle Farrar and Vernon Thomas