It is important that accountants keep up with these efforts of the IRS with respect to bitcoin and other cryptocurrencies because keeping up will enable accountants to give the best possible counsel to their clients.
Accountants need to understand the IRS’ taxation principles on cryptocurrency and need to be able to relay those principles in plain language to clients. In our previous post, we gave a cursory description of the IRS’ Revenue Ruling 2019-24 on cryptocurrency. We described how this document discussed two different scenarios involving issues of receipt of gross income. In this post, we will discuss the issues and conclusions reached in Rev. Rul. 2019-24 in greater detail.
Analyses of Two Gross Income Scenarios
Simply put, Rev. Rul. 2019-24 analyzes two scenarios to determine whether a taxpayer in either scenario has receipt of gross income. The reason why this document is useful is because it involves two cryptocurrency terms which are fairly new.
These terms are likely to be unfamiliar to the typical accountant, and even many people who already have some understanding of the cryptocurrency space. Accountants can create value for themselves by learning these terms and then educating clients who don’t have prior knowledge of them. If you have clients who are already familiar with these terms, you can improve your experience with them by being able to converse on this level.
Scenario 1: Hard Fork with No Airdrop
The first scenario discussed in Rev. Rul. 2019-24 involves a so-called “hard fork.” A hard fork refers to a situation whereby an existing cryptocurrency on an established blockchain is split into two distinct currencies. The hard fork essentially “creates” a new currency at a specific moment in time, and this new currency comes with its own corresponding blockchain.
In this first hypothetical scenario, the taxpayer doesn’t actually receive any new tokens or units of the additional cryptocurrency created by the hard fork; the hard fork merely creates a new blockchain which is capable of logging transactions of the new cryptocurrency when they occur. In other words, only a new ledger is actually created, the taxpayer doesn’t receive any new digital tokens. For this reason, the hard fork alone doesn’t lead to receipt of gross income. This is the conclusion reached by the analysis in this first scenario.
Scenario 2: Hard Fork with Airdrop & Distribution of New Digital Tokens
An airdrop refers to the distribution of digital tokens to multiple cryptocurrency holders at a certain point in time. A hard fork followed by an airdrop means, therefore, that at least one cryptocurrency holder will be in receipt of gross income. In this second scenario, the taxpayer has gross income based on the fair market value of the units of the new cryptocurrency distributed in the airdrop.
The Value of New Terminology
Theoretically, the facts and principles discussed in both of these scenarios are quite simple. In the first scenario, no receipt of gross income occurs because no value is received by the taxpayer. In the second scenario, by contrast, the taxpayer does have gross income because the taxpayer received value as a result of the airdrop.
Neither of these scenarios really contribute anything useful from a theoretical perspective. Our understanding of what constitutes receipt of gross income is basically the same as it was prior to reading Rev. Rul. 2019-24. However, where Rev. Rul. 2019-24 is really useful lies in its application of relatively obscure cryptocurrency concepts to hypothetical situations.
Now, after reading this document, accountants will be able to have at least a rudimentary understanding of these new concepts and how they operate in taxation. And this understanding will definitely be useful when discussing these concepts with clients.
When you work with your clients who have crypto holdings, the last thing you want is to be way behind when it comes to these newer concepts. You want to be able to converse with your clients on a three-dimensional level and demonstrate that you’re capable of dealing with cutting-edge concepts and terminology in a relatively new field. If a client feels that you’re not capable of “keeping up with the times,” you may be left behind.
Jorgen Rex Olson is a graduate of Washington State (B.A., cum laude, 2008) and the Indiana University (McKinney) School of Law (J.D., 2012). He writes for Mackay, Caswell & Callahan, P.C., one of the leading tax law firms in New York State.