New Rulings Address Tax Treatment of Crypto Coins
Received in “Hard Forks” and “Airdrops”
The Internal Revenue Service issued guidance on October 9, 2019, that addressed the tax treatment of new cryptocurrency coins received in “hard fork” and “airdrop” events.
A “hard fork” occurs when a distributed ledger (such as “blockchain”) undergoes a protocol change and results in a new cryptocurrency on a new distributed ledger in addition to the cryptocurrency coins existing on the legacy ledger. Following the hard fork, the new cryptocurrency is reflected on the new distributed ledger, and transactions involving that new coin are recorded on the new distributed ledger. Transactions involving the legacy ledger continue to be recorded on the legacy distributed ledger.
An “airdrop” is a means of distributing units of cryptocurrency to the distributed ledger of multiple addresses on the distributed ledger. When a “hard fork” is followed by an “airdrop,” the new cryptocurrency is recorded on the distributed ledger. If the holder of the legacy coin to which the new cryptocurrency is credited can access and dispose of the new coin, then the holder is considered to have dominion and control over that new airdropped cryptocurrency.
The IRS ruling states that a person does not have taxable income as a result of a “hard fork” of cryptocurrency he owns so long as the new coin is not airdropped or otherwise transferred into an account that he controls.
In contrast, if new cryptocurrency is “airdropped” and reflected in the account of the holder of the initial cryptocurrency, the holder is considered to have dominion and control over the new airdropped coin, and therefore is deemed to have taxable income upon its receipt, based upon the new coin’s fair market value on the date received, whether the holder disposes or otherwise transfer the new airdropped cryptocurrency.
The IRS ruling, Rev. Rul. 2019-24, was issued on October 19, 2019. Although a Revenue Ruling issued by the IRS does not have the authority or force of law of a statute (such as the Internal Revenue Code) or a Tax Regulation, it does reflect the position of the IRS and generally binds the IRS to adhere to that position.
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