After IRS Commissioner Charles Rettig’s comments on May 30, 2019, practitioners and investors waited anxiously for additional guidance clarifying the tax treatment of cryptocurrency. On October 9, 2019, the IRS released the much anticipated guidance in Revenue Ruling 2019-24 and an outline of frequently asked questions (FAQs). This is the first guidance issued since 2014 that provides additional information building on Notice 2014-21, which provided the basic understanding of cryptocurrency taxation.
The Revenue Ruling is limited to the timing of income recognition when a hard fork or an airdrop occurs. Specifically, the Ruling states that such income is deemed received at the time a taxpayer has dominion and control over the new coin or token.
For example, a taxpayer does not have dominion and control if the address to which the cryptocurrency is airdropped is controlled by a cryptocurrency exchange and the cryptocurrency exchange does not support the forked or airdropped coin or token.
The FAQs are intended to expand the examples outlined in Notice 2014-21 regarding cryptocurrency’s tax treatment as property held for investment. The FAQs clarify the methods for determining fair market value upon receipt of a hard fork or an airdrop, whether on a cryptocurrency exchange or through a peer-to-peer transaction.
For example, in determining the amount of income received upon a hard fork, the FAQs clarify if a taxpayer receives the forked coin or token or an airdrop facilitated by a cryptocurrency exchange, the amount realized in income is the amount the cryptocurrency exchange records in fiat for that transaction. If the hard fork or airdrop is received in a peer-to-peer transaction, the IRS will accept as evidence of the fair market value the amount recorded on a cryptocurrency or blockchain explorer, which analyzes worldwide indices of cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.
Additionally, the FAQs clarify a taxpayer’s ability to use specific identification when selling or exchanging their cryptocurrency obtained at different times to maximize tax planning opportunities.
Although this guidance is helpful regarding income recognition, it falls short of providing comprehensive guidance on issues affecting cryptocurrency investors. For example, neither the Revenue Ruling nor the FAQs specifically mention the tax treatment of staking income — such as trade or business income or passive income — lending in cryptocurrency or potential foreign withholding obligations.
This guidance follows IRS Information Release 2019-132 advising cryptocurrency owners on how to pay back taxes through filing amended returns. Taxpayers not properly reporting their cryptocurrency transactions (as outlined in this new guidance and Notice 2014-21) may be liable for additional tax, penalties and interest.
Contact Cynthia Pedersen at cynthia.pedersen@cohencpa.com, Peter Gilroy-Scott at peter.gilroy-scott@cohencpa.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.