Crypto Tax & Rev Rul 2019-24
We’ve said before that the IRS will only continue to increase its crypto tax collection efforts on cryptocurrency gains. We now have concrete proof that this is in fact the case. On October 9, IRS guidance came in the form of IR-2019-167, which contains two important additions to the IRS enforcement of crypto tax. IR-2019-167 includes Revenue Ruling 2019-24, and a series of FAQs regarding cryptocurrency taxation. In this post, we will go over Rev. Rul. 2019-24. Rev. Rul. 2019-24 offers analyses of two situations. These situations are fairly new developments regarding digital currencies. These situations touch on the definition of “gross income” under the IRC. Let’s look at these two situations and then discuss IRS conclusions.
Crypto Tax: Hard Forks & Airdrops
Rev. Rul. 2019-24 discusses two virtual currency transactions: one involves a “hard fork” and another involves an “airdrop.” The term hard fork refers to a situation in which a separate digital transaction ledger is created from an existing ledger, and the new ledger records transactions of a novel cryptocurrency variation. In other words, not only does the ledger split into two separate ledgers, the new ledger no longer records transactions of the original digital coin, but records transactions from an entirely new digital coin created at the moment when the ledger splits.
An airdrop refers to the dropping of digital coins into many digital wallets. An airdrop may occur following a hard fork in order to thoroughly distribute the new resultant cryptocurrency. Airdrops do not necessarily have to follow a hard fork, however. Nor does an airdrop necessarily result in the recipient having possession or access to the new digital coins. For instance, if a recipient maintains a digital wallet on an exchange which doesn’t recognize the new coin distributed through the airdrop, then the recipient may not necessarily have constructive receipt of the new coin.
In the first situation of Rev. Rul. 2019-24, the IRS describes a scenario involving a hard fork with no accompanying airdrop. In this situation, a taxpayer owns a cryptocurrency, Crypto M, and that cryptocurrency’s ledger undergoes a hard fork. That hard fork results in the creation of an entirely new cryptocurrency, Crypto N. However, the taxpayer does not receive any new tokens of Crypto N in an airdrop following the hard fork. In other words, the taxpayer does not receive any additional tokens.
In this situation, the taxpayer owns a cryptocurrency known as Crypto R, and Crypto R’s ledger experiences a hard fork. This hard fork results in a new cryptocurrency, Crypto S. Following the hard fork, an airdrop takes place and the taxpayer receives units of the new Crypto S cryptocurrency. At the end of the airdrop, the taxpayer holds 25 units of Crypto S, and those 25 units are valued at $50 at the time of receipt (so $2 per unit).
The Conclusions of Rev. Rul. 2019-24
On situation #1, the IRS says that the taxpayer is not in receipt of gross income as a consequence of the hard fork. And the reason for this is simple. The taxpayer didn’t receive any of the units of the new cryptocurrency created by the hard fork. As a general rule, to have gross income, a taxpayer must be in physical or constructive receipt of property or have capital gains derived from property. The taxpayer did not receive any units of the new currency and so the taxpayer doesn’t have any gross income from the hard fork. In situation #2, however, the IRS states that the taxpayer does in fact have gross income as a consequence of the hard fork and subsequent airdrop. This equates to a crypto tax liability. This is because the taxpayer has receipt of the new cryptocurrency units, and those units have a monetary value. When a taxpayer receives property, the amount received is determined by the fair market value of the property at the time of receipt. This means that the taxpayer has gross income of $50 regardless of whether the value of the new cryptocurrency rises or falls at a later date.
Learn More About Crypto Tax
The conclusions of Revenue Ruling 2019-24 may seem simple enough, but they aren’t necessarily straightforward for those unfamiliar with this terminology. Most people are unfamiliar with the terms “hard fork” and “airdrop,” for instance. Still, this ruling provides a nice clarification for what will likely be a common scenario in the future. We can anticipate that many new cryptocurrencies will be created in this way. Now, taxpayers will have a better understanding of the expected tax consequences. At Mackay, Caswell & Callahan, P.C., our tax professionals work hard to stay on the cutting edge of tax collection. This means that we go the extra mile and review new material as soon as it’s available. We will continue to feature articles on the finer points of IR-2019-167 in the coming weeks. In the meantime, if you need assistance, give one of our top New York City tax attorneys a call today.