The IRS issued Rev. Rul. 2019-24
and guidance in the form of frequently asked questions
(FAQs) related to the tax treatment of transactions involving cryptocurrency.
The revenue ruling related to the tax treatment of two scenarios involving cryptocurrency. In the first situation, a taxpayer held 50 units of a cryptocurrency, which experienced a “hard fork” that resulted in the creation of a new cryptocurrency. However, the new cryptocurrency was not transferred to an account owned or controlled by the taxpayer. The IRS held that the taxpayer did not have gross income under Section 61 as a result of the hard fork because the taxpayer did not receive any units of a new cryptocurrency.
The second situation provided that a taxpayer held 50 units of a cryptocurrency that experienced a hard fork and resulted in 25 units of a new cryptocurrency that was “air dropped” and distributed to the taxpayer. In this situation, the taxpayer had the ability to dispose of the new cryptocurrency immediately following the airdrop and the new cryptocurrency had a fair market value of $50. The IRS ruled that the taxpayer had gross income under Section 61 as a result of the air drop because the taxpayer received units of the new cryptocurrency.
The FAQs generally reiterate the tax treatment of transactions involving virtual currency as described in Notice 2014-21, which provided that virtual currency is treated as property for tax purposes and general tax principles applicable to property apply. However, they do offer expanded guidance in some areas. For example, they provide that a taxpayer may identify a specific unit of virtual currency that is sold, exchanged, or otherwise disposed. Prior to the FAQs, it was unclear whether a taxpayer could apply such specific identification when units of the same virtual currency were acquired at different times and the taxpayer had different basis. The FAQs are intended to apply only to taxpayers who hold virtual currency as a capital asset.
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