Mackay, Caswell & Callahan, P.C.
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The New IRS Tax Guidance on Cryptocurrency

In a follow up to Notice 2014-21, the IRS released IR-2019-167 on October 9, 2019.

Oct 14th 2019
Mackay, Caswell & Callahan, P.C.
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This publication consists of two components: Rev. Rul. 2019-24, and 43 frequently asked questions which pertain to cryptocurrency held as a capital asset. IR-2019-167 is designed to supplement Notice 2014-21. In addition to discussing how basic tax principles apply to cryptocurrency, Notice 2014-21 included answers to numerous frequently asked questions.

The FAQs included in IR-2019-167 provide a more thorough treatment on the taxation of cryptocurrency as investment property. In this post, we will discuss the basic contributions made by IR-2019-167 to the taxation of cryptocurrency. As we will see, the new Revenue Ruling clarifies issues related to two novel developments in the cryptocurrency world; and the FAQs answer multiple complex hypothetical scenarios involving the sale or acquisition of cryptocurrency as investment property.

Overview of Revenue Ruling 2019-24

In the cryptocurrency space, the term “hard fork” refers to the creation of a new digital token as a consequence of the “splitting” of an existing digital token into two separate currencies. The newly created digital token is then logged separately on an entirely new electronic ledger (or “blockchain”). A hard fork itself doesn’t necessarily result in the delivery of new digital tokens to cryptocurrency holders, only the creation of a new token on a new ledger. What’s more, the term “airdrop” refers to the delivery of digital tokens to multiple cryptocurrency holders. An airdrop can follow a hard fork. 

Revenue Ruling 2019-24 provide analyses and conclusions to two separate hypothetical scenarios, one scenario involves a hard fork, and the second involves a hard fork followed by an airdrop. In the first scenario, a hard fork occurs and a new digital token is created when an existing token is split.

However, the taxpayer doesn’t receive any new tokens. The IRS’ conclusion is that the taxpayer doesn’t have taxable income as a consequence of the hard fork because no additional tokens were received. In the second scenario, a hard fork is followed by the receipt of a certain quantity of the newly created digital currency.

The IRS’ conclusion is that the taxpayer has taxable income equal to the fair market value of the digital tokens received. Essentially, these two scenarios are a couple of relatively straightforward questions pertaining to the definition of gross income. But, even though they are conceptually simple, they involve new developments in the cryptocurrency space, and so the guidance is useful.

Overview of the FAQs Component

As mentioned, the frequently asked questions component of IR-2019-167 contains a total of 43 questions and answers. These questions range from the very simple to the complex. The IRS is trying to proactively tackle all conceivable scenarios involving the sale or acquisition of cryptocurrency.

This effort is meant to aid cryptocurrency investors as they plan ahead for the possible consequences of gains. The IRS references preexisting material when it makes sense to do so. For instance, the IRS provides a reference to its manual, Publication 544, on the disposition of assets.

The questions begin on the simpler side; the first question is the simplest – “what is virtual currency?” – and then the questions gradually increase in complexity. Those who intend to speculate in cryptocurrency will find answer to basically every conceivable hypothetical scenario. The IRS provides an answer on the question of the taxability of cryptocurrency transfers from one digital wallet to another, for example; the IRS also addresses the issue of the tax basis of cryptocurrency received as a bona fide gift. 

Expect More Guidance in the Future

Publication IR-2019-167 has been a very anticipated document. Investors in the cryptocurrency space have been waiting for additional guidance so that they can be adequately prepared when tax time rolls around. Practitioners have also been seeking counsel on the tax implications of novel cryptocurrency developments (such as a hard fork).

The two components – Rev. Rul. 2019-24 and the 43 FAQs – do quite a lot to provide clarification and help cryptocurrency investors get a grip on the possible tax consequences of their cryptocurrency investments. Of course, cryptocurrency investors should be sure to consult with an accountant prior to filing their return whenever they have cryptocurrency capital gains.

An accountant is necessary to ensure that the liability is calculated properly. And, in cases involving back cryptocurrency tax debt, a tax attorney may be necessary to resolve cryptocurrency tax debt in an optimal manner.

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