On October 9, 2019, the IRS released Revenue Ruling 2019-24 (Rev. Rul. 2019-24) to provide clarity on the taxability of cryptocurrency when it’s transferred via hard forks or airdrops.
Along with the ruling, the IRS also issued Frequently Asked Questions (FAQs) on Virtual Currency Transactions, providing 43 questions and answers for those seeking guidance. This was the first guidance issued by the IRS since 2014.
The following is an overview of updates and implications for businesses and individuals.
On May 16, 2019, the IRS issued a letter acknowledging that additional cryptocurrency guidance was needed and would be forthcoming. A few months later, the IRS issued over 10,000 notices in three varieties—Letter 6173; Letter 6174; Letter 6174-A—to various taxpayers with accounts on crypto exchanges.
However, these letters were only the precursor to the main guidance—Rev. Rul. 2019-24 and the accompanying FAQs. These updates show that the IRS is taking steps to address some of grey areas related to tax treatment of cryptocurrency, demystifying areas of the law that have historically concerned taxpayers and practitioners.
There’s been plenty of speculation from tax practitioners regarding whether cryptocurrency should receive ordinary or capital-gain treatment if it’s received from an airdrop as the result of a fork.
According to Rev. Rul. 2019-24, the IRS believes these transactions should be characterized as ordinary income. The ruling goes on to provide examples showing that ordinary, recognized income would be the tax basis to the taxpayer if they later sell the cryptocurrency. Many taxpayers were likely hoping for a more favorable ruling from the IRS.
Within the ruling, the IRS also heavily focused their efforts on defining various cryptocurrency terms. Here are a few of the terms the IRS highlights in its latest—and only—revenue ruling on cryptocurrency.
The IRS’s FAQs expand upon some of the examples from Notice 2014-21 and supplement guidance issued in 2014. The FAQs clarify questions such as:
These FAQs will likely provide much-needed insight into cryptocurrency tax matters, such as choosing an appropriate method for accounting for tax basis, receiving a deduction for donating cryptocurrency to a not-for-profit, and determining what happens when cryptocurrency is moved from one wallet to another.
For the full list of FAQs, visit the IRS website.
At the time of this writing, an updated 2019 version of the Form 1040, Schedule 1, and instructions—dated December 20, 2019—can be found on the IRS website. The updated schedule includes a question for taxpayers that asks, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” It then requires filers to check yes or no.
If a taxpayer owns cryptocurrency that forked, asking the following questions can help reveal if there’s a taxable event that should be reported.
Rev. Rul. 2019-24 addresses each of the above questions, including the character of the gain to the taxpayer.
With much-needed IRS guidance on hard forks and airdrops finally issued, cryptocurrency holders can finally relax, knowing that they’re operating in compliance with the IRS’s current guidance.
That said, there are still many unanswered cryptocurrency-related questions, and more guidance is needed. Guidance may continue to fall behind the burgeoning, fast-paced cryptocurrency and blockchain industry. New ways to earn revenue, such as staking, may be next on the wish-list for IRS clarification.
Additionally, state and local jurisdictions will need to address state nexus rules, apportionment, and sourcing when it comes to trade or business activities, such as mining. At least for now, the IRS is working hard to push out guidance, and there is likely much more to come.
For more information about Rev. Rul. 2019-24, the IRS’s FAQs on Virtual Currency Transactions, or how guidance may impact individuals and businesses, contact your Moss Adams professional.