By Troy Cannode, CPA

The IRS issued two new pieces of guidance on Oct. 9, 2019, that provide additional clarity regarding the taxation of virtual currency: Revenue Ruling 2019-24¹ and a broader set of frequently asked questions (FAQs). These documents expand on IRS guidance issued in 2014.² In 2014’s IRS Notice 2014-21, the agency stated that virtual currency would be treated as property as opposed to currency. The set of FAQs at the time addressed topics including receiving virtual currency as payments for goods or services, appropriate methods to calculate basis of virtual currency, calculation of gain or loss on exchanging of virtual currency, and information reporting requirements regarding payments of virtual currency, among others.³ The 2019 revenue ruling and FAQs add to our understanding.

Revenue Ruling 2019-24

Revenue Ruling 2019-24 focuses on two questions:

• Does a taxpayer have gross income under Section 61 of the Internal Revenue Code (IRC) because of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency?
• Does a taxpayer have gross income under Section 61 of the IRC because of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of a new cryptocurrency?

Before addressing the underlying issue of whether or not the taxpayer has gross income to include, two terms need to be defined: hard fork and airdrop. A hard fork, in simplistic terms, happens when developers of virtual currency software rules or protocols disagree and create separate, divergent rules and protocols. An airdrop is essentially delivering coins or tokens to multiple parties, in some cases as a way to promote a new cryptocurrency.

Revenue Ruling 2019-24 focuses on two main situations: the first involves a hard fork with no airdrop, and the second involves a hard fork followed by an airdrop of additional new cryptocurrency. With regard to the first situation, the revenue ruling states that a taxpayer does not have gross income under Section 61 as a result of a hard fork if the taxpayer does not receive units of the new cryptocurrency, noting that the taxpayer did not have an accession of wealth as required under Section 61.

In the second situation, the revenue ruling states that the taxpayer would have gross income under Section 61 because the taxpayer received new units of cryptocurrency. The revenue ruling addresses two additional issues with regard to the second situation: what value does the taxpayer include in gross income and when does the taxpayer include that value in gross income. The revenue ruling references other sections to address these issues: Section 1012 in reference to the value of the new cryptocurrency and fair market value, and Section 451 with regard to when to include and when constructively received.

Frequently Asked Questions

The FAQs identify common questions surrounding virtual currencies, including what is virtual currency, what is its tax treatment, and how does one calculate gain or loss on exchanges of cryptocurrencies? The new set of FAQs also addresses questions about hard forks and soft forks, receipt of cryptocurrency as a gift, reporting of cryptocurrency on tax returns, and record retention requirements.

The world of cryptocurrency continues to evolve, and there is no reason to think the most recent clarifications are the end of it. The IRS will continue to release guidance as new issues and questions emerge around the use and consumption of cryptocurrency.

¹ Revenue Ruling 2019-24
² Notice 2014-21
³ The PICPA published an article in the spring of 2019 in its digital-only bonus edition of the Pennsylvania CPA Journal titled “Cryptocurrencies and the Tax Rules Involved.”

Troy Cannode, CPA, is an assistant professor of accounting at Lycoming College in Williamsport, Pa. He can be reached at cannode@lycoming.edu.

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