The IRS released guidance on April 9 (ILM 202114020) that addresses when taxpayers recognize income related to the Bitcoin “hard fork” that occurred on Aug. 1, 2017, where holders of Bitcoin received Bitcoin Cash.
The ILM addresses when taxpayers recognize income under a pair of situations related to the Bitcoin hard fork, a protocol change that creates a new version of a blockchain. In situation one, the taxpayer had sole control over a private key that held one unit of Bitcoin. Following the hard fork, the taxpayer continued to hold one unit of Bitcoin, but also held one unit of Bitcoin Cash and had the ability to trade Bitcoin Cash. The IRS concluded that the taxpayer had ordinary income in 2017 under Section 61 equal to the fair market value of the Bitcoin Cash as of the date of the hard fork. Because the taxpayer had the ability to trade the Bitcoin Cash at the time of the hard fork, the taxpayer had dominion and control.
In situation two, the taxpayer also held one unit of Bitcoin, but did not hold it directly. The taxpayer was a customer of a cryptocurrency exchange who held the unit in a hosted wallet, and the cryptocurrency exchange had sole control over the private key. Further, at the time of the hard fork, the cryptocurrency exchange decided not to support Bitcoin Cash, which resulted in the taxpayer not being able to trade the Bitcoin Cash. On Jan. 1, 2018, the cryptocurrency exchange decided to support Bitcoin Cash which enabled the taxpayer to trade Bitcoin Cash. The IRS concluded in situation two that the taxpayer had ordinary income in 2018 equal to the fair market value of the Bitcoin Cash as of Jan. 1, 2018. Because the taxpayer did not have dominion and control over the Bitcoin Cash at the time of the hard fork, the taxpayer did not have income in 2017.
The ILM is consistent with prior guidance (e.g. FAQs
published by the IRS and Rev. Rul. 2019-24
). In Rev. Rul. 2019-24, the IRS ruled that a taxpayer owning a cryptocurrency that undergoes a hard fork has gross income under Section 61 if the hard fork results in a new cryptocurrency and the taxpayer actually or constructively receives the new cryptocurrency as a result of the hard fork.
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