IRS releases first cryptocurrency guidance in five years | Knowledge | United States | Global law firm | Norton Rose Fulbright

On October 9, 2019, the Internal Revenue Service ( IRS ) issued much-anticipated guidance on cryptocurrency transactions when it released Revenue Ruling 2019-24. This tax income Ruling discusses the tax implications of two previously unsettled areas of tax law : “ hard forks ” and “ air drops. ” The IRS besides updated its FAQs on virtual currency transactions. On October 10, 2019, the IRS released a draft of the updated shape 1040, Schedule 1, Additional Income and Adjustments to Income, which now includes a question about cryptocurrencies .


The IRS has not released meaning steering on virtual currency transactions in over five years. In March 2014, the IRS issued Notice 2014-21 ( the Notice ), stating that cryptocurrency was to be treated as property, quite than currency for US federal income tax purposes. The IRS besides stated that taxpayers must “ in computing arrant income, include the fair market value of the virtual currentness, measured in US dollars, as of the date the virtual currentness was received. ” Following the Notice, anyone spend or exchanging a cryptocurrency was treated as if he or she was selling an asset and was required to report any result profit or loss for US federal income tax purposes on their return .
however, the Notice left many unanswered questions. For exercise, many people raised concerns about the taxability of events resulting from a change to the cryptocurrency itself, without any military action on the separate of the taxpayer. In the modern guidance released by the IRS, the IRS attempts to address two such situations – “ hard fork ” and “ air travel drops. ”

Hard forks

A hard fork occurs when a cryptocurrency on a circulate daybook undergoes a protocol change that may result in a permanent diversion from the bequest distributed ledger and in some instances, may create a raw cryptocurrency. You can think of a “ hard fork ” as something alike to receiving a fresh credit card if your erstwhile one was compromised. If your card was stolen by a thief, and you report it, you will receive a new card with a different number. Your bank will deactivate the erstwhile one. That ‘s a “ hard fork ” —you hush can use the lapp brand of credit wag, but the old issue no longer is valid ; only the fresh one cultivate.

Another analogous case is if you receive newfangled shares of company stock as a result of a amalgamation. If you were a stockholder of ABC Company and ABC merged with XYZ Company to create 123 Corporation, in a pure-share commute bargain, shareholders of both companies would receive shares of 123 in exchange for their old shares. The shares in ABC and XYZ would be despicable as of the effective date of the amalgamation. The “ arduous pitchfork ” occurs when you swap your ABC or XYZ shares for 123 shares .
accredit cards and, sometimes, shares of lineage can exist in “ actual universe ” form—you have a credit card credit card or you may receive a newspaper share certificate. Cryptocurrency, however, merely exists electronically, making a “ difficult crotch ” simple to implement and instantaneous .
The most celebrated cryptocurrency “ hard fork ” occurred in 2016 when the Ethereum blockchain included a crowd-sourced venture capital fund called The Distributed Autonomous Organization ( DAO ). There was an error in the blockchain code of the DAO that enabled a bad actor to steal the cryptocurrency – US $ 45 million of it – from the DAO. The DAO ‘s leaders created a new currency through a “ intemperate fork ” —making the old cryptocurrency worthless and depriving the bad actor of any value in the steal cryptocurrency .


An airdrop occurs when cryptocurrency is distributed to the wallet addresses of multiple taxpayers, normally for dislodge. wallet addresses are where an individual stores his or her cryptocurrency, like a normal wallet. The goal of an airdrop is typically to cause widespread awareness and broad distribution for a blockchain visualize. It can besides be used to incentivize former token holders or to distribute new cryptocurrency after a hard fork to the holders of the bequest cryptocurrency. This practice has raised questions about the tax implications of airdropped cryptocurrency – if you received extra tokens through an airdrop without asking for them, basically as a endowment, do the extra tokens measure to taxable income ? Revenue Ruling 2019-14 says yes .

Revenue Ruling 2019-14 and related guidance

The modern Revenue Ruling addresses two specific situations : situation 1 : a difficult fork of a cryptocurrency where the taxpayer receives no raw cryptocurrency and Situation 2 : a arduous fork of a cryptocurrency followed by an airdrop of a raw cryptocurrency, where the taxpayer receives newfangled cryptocurrency.

In Situation 1, the IRS held that a taxpayer does not have gross income under Section 61 of the Internal Revenue Code of 1986, as amended, if the taxpayer did not receive any units of raw cryptocurrency. conversely, when a taxpayer receives new units of cryptocurrency from an airdrop as in Situation 2, the taxpayer would recognize ordinary crude income .
To illustrate, if your digital wallet held 50 units of cryptocurrency M with a fair commercialize measure of US $ 100, and after a “ hard fork ” you held 50 units of cryptocurrency N with a fairly marketplace prize of US $ 100, you did not have any accession of wealth and consequently there would be no megascopic income to recognize. You would have the ability to buy or sell all 50 units of cryptocurrency N, but your US $ 100 footing has not changed .
however, if after the hard fork, 10 newly units of cryptocurrency S were airdropped into your digital wallet, and your digital wallet on the spur of the moment had 50 units of cryptocurrency M with a fair marketplace value of US $ 100 and 10 units of cryptocurrency S with a average market value of US $ 55, you would have an accession of wealth and recognize US $ 55 in gross income as of that date .
The IRS further explained that a taxpayer does not “ experience ” cryptocurrency if the taxpayer is not able to exercise dominion and see over the cryptocurrency. For exercise, if raw cryptocurrency is airdropped onto a digital wallet managed by a cryptocurrency exchange and that exchange does not support the new cryptocurrency, the taxpayer does not have dominion and command over the cryptocurrency. If the exchange begins to support such cryptocurrency at a late time, the taxpayer will be treated as receiving the cryptocurrency at that time, when they have the ability to transfer, sell, change or differently dispose of it.

While the crypto industry has long asked for an exemption for transactions below a sealed threshold ( a de minimis exemption ) to spare those who engage in small transactions, like purchasing a cup of coffee with Bitcoin, the IRS did not do then. In the IRS ‘ view, because there is not a de minimis exemption for early types of property, lacking instructions from Congress, there should not be one for cryptocurrencies either .
The FAQs delved further into these topics and virtual currency transactions in general. Most notably, the IRS explained :

  • Your cost basis in virtual currency purchased with real currency is the amount you spent to acquire the virtual currency, including fees, commissions and other acquisition costs in US dollars.
  • If you transfer virtual currency from a wallet or account belonging to you to another wallet or account that also belongs to you, that transfer is a non-taxable event.
  • If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged or otherwise disposed of on a first in, first out (FIFO) basis – in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired.
  • If you receive virtual currency in exchange for providing services, you recognize ordinary income. In an arm’s length transaction, your basis in such virtual currency is the fair market value of the virtual currency, in US dollars, when the virtual currency is received.
  • If virtual currency is received as a bona fide gift, no income is recognized until you sell, exchange or otherwise dispose of that virtual currency. Your basis in virtual currency received as a bona fide gift differs depending on whether you will have a gain or a loss when you sell or dispose of it. For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift. For purposes of determining whether you have a loss, your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift. If you do not have any documentation to substantiate the donor’s basis, then your basis is zero.
  • If you make a donation of virtual currency to a charitable organization, you will not recognize income, gain or loss from the donation. You will be entitled to a charitable contribution deduction equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for a year or more. If you have held the virtual currency for one year or less at the time of the donation, your charitable contribution deduction is the lesser of your basis in the virtual currency or the virtual currency’s fair market value at the time of the contribution.
  • A “soft fork” occurs when a distributed ledger undergoes a protocol change that does not result in a diversion of the ledger and thus does not result in the creation of a new cryptocurrency. Because “soft forks” do not result in you receiving new cryptocurrency, a “soft fork” will not result in any income to you.

Form 1040 Schedule 1

A draft of an update form 1040, Schedule 1, Additional Income and Adjustments to Income, was besides released by the IRS with an extra checkbox asking taxpayers about their fiscal interests in virtual currency. The new form asks the stick to : “ At any time during 2019, did you receive, sell, send, substitution, or otherwise acquire any fiscal interest in any virtual currentness ? ” If the answer to this question is No and taxpayers do not have to file Schedule 1 for any other purpose, then they do not need to file Schedule 1 .

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