On October 9, the IRS released Revenue Ruling 2019-24, which offers the agency’s first cryptocurrency guidance since 2014.
As described in our most recent cryptocurrency article,The IRS Turns its Focus to Cryptocurrency, cryptocurrency is a form of virtual cash that allows payment to be sent online from one individual to another, while circumventing traditional financial institutions. In its brief history, cryptocurrency has largely evaded direct regulation.
The most recent cryptocurrency guidance from the IRS, Revenue Ruling 2019-24, discusses a specific cryptocurrency occurrence called a “hard fork.” This is when a particular cryptocurrency “undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger.” The cryptocurrency has effectively broken from the public ledger on which it was once tracked, and future transactions are now tracked on a new ledger.
When a “hard fork” occurs, those broken-off units of cryptocurrency are in some cases “air-dropped,” or delivered, to users’ online cryptocurrency “wallets.” However, in some instances such as when the “wallet” is managed by a cryptocurrency exchange that does not yet recognize the new cryptocurrency, a delay occurs. A common example of this delay is when funds are “pending” in a bank account after deposit. The funds are ultimately ours, but we do not have the ability to access the funds or move them around yet. Once the cryptocurrency exchange recognizes the new units of cryptocurrency, they will be accessible to the user. Under Rev. Rul. 2019-24, it is at this point that the taxpayer “has receipt” of the cryptocurrency, and, more importantly, realizes income.
According to the Revenue Ruling, “hard-forked” and “airdropped” cryptocurrency is taxable upon receipt, but also receives a new “basis” of the currency’s fair market value at the time of receipt.
As discussed in our most recent cryptocurrency article, “warning letters” sent to taxpayers in July effectively stated that cryptocurrency should be treated as a capital asset. This would mean that cryptocurrency is taxable when sold.
Further IRS guidance will be necessary for taxpayers to have a clearer picture of how to properly treat cryptocurrency for taxation purposes.
We will continue to stay current on this topic. Please contact us if you have any questions.
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