Cryptocurrency Alert: IRS Issues Much Needed Guidance
In our previous issue from June and August, we discussed relevant issues regarding the tax treatment of cryptocurrency in the United States. On October 9th, 2019, the IRS issued highly sought-after guidance under Revenue Ruling 2019-24, accompanied by a set of 43 frequently asked questions.
While common issues arising from cryptocurrency transactions have been resolved by the IRS under the previous Notice 2014-21, the tax consequences of certain type of transactions, so-called hard fork and air drops, have been unanswered until now. Simply put, a hard fork occurs when a single cryptocurrency splits into two new cryptocurrencies. An airdrop involves a free distribution of coins or tokens from a blockchain to certain members for promotional purposes.
Taxpayers should be aware that in this new guidance, the IRS reiterates that cryptocurrency should be treated as property for federal income tax purposes, and as a result any intent to classify any type of cryptocurrency transaction like foreign currency dealings will be disregarded and reassessed by the IRS.
The tax treatment of a hard fork recipient will depend on whether the taxpayer is able to exercise “dominion and control” over the new cryptocurrency. The Revenue Ruling follows the long-standing tax case dealing with the treatment of gross income for federal income tax purposes, in Commissioner v. Glenshaw Glass Co., where the Supreme Court determined that gross income constitutes any accession to wealth that is clearly realized and over which a taxpayer has complete dominion and control. As a result, whenever a taxpayer has immediate dominion and control over the new cryptocurrency in a hard fork transaction, the taxpayer will be required to include in the taxpayer’s gross income the fair market value of the cryptocurrency received.
On the other hand, if after a hard fork, the taxpayer does not have dominion and control over the crypto currency, there is no need to include it in taxpayer’s gross income until the moment when the taxpayer acquires the ability to transfer, sell, exchange, or otherwise dispose of such cryptocurrency.
Similarly, if a taxpayer receives new cryptocurrency as a result of an airdrop, the taxpayer will have dominion and control whenever the cryptocurrency is recorded on the distributed ledger, at which point it will constitute gross income for the taxpayer.
Finally, the Revenue Ruling confirms that taxpayers should treat the new cryptocurrency as ordinary income, regardless of the holding period of the original cryptocurrency.
Barbosa Legal can help. Contact at jbarbosa@barbosalegal.com; eberd@barbosalegal.com; or ahernandez@barbosalegal.com to understand the tax treatment of crypto currency as it applies to you.