After many years, the U.S. Internal Revenue Service finally addressed some cryptocurrency tax questions. Via Revenue Ruling 2019-14, the IRS expatiated on issues relating to forks and valuation calculations. It also defined cryptocurrency for the first time.
Let’s review the “need to know” points.
Revenue Ruling 2019-24: Cryptocurrency Fork Tax Implications
In Revenue Ruling 2019-24, the IRS considers two main questions regarding forks:
- Does profit resulting from a hard fork count as “gross income” ( e.g., compensation for services, fringe benefits, property and rental gains, interest payments, royalties, dividends, annuities, endowment and trust incomes, pensions, et cetera) if the holder doesn’t acquire units of the new tokens?
- Following a hard fork, are proceeds from a cryptocurrency “airdrop” considered “gross income” if the person receives units of a new token? (A baffling question since the agency substituted “airdrop” for “new coins resulting from a fork” — which isn’t the commonly understood definition.)
Ultimately, the agency answered the questions “no” and “yes,” respectively. They reasoned that if an individual, fund, or company doesn’t “receive” new units, then no income is realized. Conversely, the dilemma posed in the second question represents “an accession to wealth” that should count as gross income.
The reasoning is sound on the surface, but the agency may have overlooked aspects of the cryptocurrency ecosystem. So while well-intentioned, Revenue Ruling 2019-24 created a few more questions than it answered, at least when it comes to gains and losses derived from crypto forks. For example: Do crypto investors now have to worry about “phantom income”? Moreover, what does it mean to “receive” tokens?
It should be noted that revenue rulings are pronouncements by the IRS that do not have the force and effect of law. “A [revenue] ruling is merely the opinion of a lawyer in the agency. … It may be helpful in interpreting a statute, but it is not binding on … the courts.” See Halliburton Co. v. Commissioner , 100 T.C. 216 (1993).
Nevertheless, federal courts often accord significant weight to the determination of the IRS in its revenue rulings.
To date, no United States Tax Court case—nor any other federal case—approves of the treatment prescribed by Rev. Rul. 2019-24. The ruling has been cited in only one Tax Court case, where the taxpayer and the IRS had already entered into a stipulation as to the timing, amount, and character of the crypto gains before presenting other issues case to the court; that case does not appear to involve the tax treatment of airdrops.
Revenue Ruling 2019-24: IRS Finally Defines “Cryptocurrency”
In Revenue Ruling 2019-24, the IRS defines cryptocurrency for the first time. It reads:
‘Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction.’
Revenue Ruling 2019-24: Calculation Clarifications
The main takeaway from the valuation section of Revenue Ruling 2019-24 is that the exchange-specific USD price should determine dollar values at the time of the transaction. Previously, most people used figures from aggregator services like CoinMarketCap. Moving forward, it may not be the best option.
To comply with the established valuation standards, vigorous bookkeeping must become crypto holders’ new norm. Stats to track include:
- The time and date for every token acquisition;
- The fair market value and your basis for every token acquisition;
- The time and date for every token offloaded (sold, exchanged, et cetera);
- The fair market value and the actual amount received for every token offloaded.
Crypto traders that fail to document this information must use the first-in, first-out accounting model to calculate gains and losses.
Regarding income, Revenue Ruling 2019-24 also stipulated that people who receive crypto as a gift don’t need to declare it as income.
Revenue Ruling 2019-24: Crypto Charity Donations
If you donate crypto that you’ve held for over a year to a qualifying charity, the transaction won’t trigger a gain or loss. Plus, you can deduct the fair market value at the time of donation. For example, let’s say you bought Bitcoin for $1,000 five years ago. On the day you donate it, it’s worth $10,000. As such, you can use the $10,000 valuation in your charitable donation deduction calculation. Remember, however, that the rules for charitable giving changed with the TCJA, so consult with a tax lawyer to best leverage the new philanthropic giving rules.
Connect with a Cryptocurrency Tax Lawyer
The Gordon Law Group works with businesses and individual crypto investors on all manners of tax, accounting, and legal issues. Get in touch today to discuss your situation.
