On Oct. 9, the Internal Revenue Service (IRS) issued additional guidance regarding the taxation of cryptocurrency. The guidance comes more than five years after the IRS issued Notice 2014-21, the first and, until now, only official guidance regarding cryptocurrency.
Revenue Ruling 2019-24 (the Revenue Ruling) reaffirms that virtual currency is treated as property and does not constitute currency. The Revenue Ruling distinguishes virtual currencies from foreign currencies. According to the Revenue Ruling, foreign currency, unlike virtual currency, is “legal tender, circulates, and is customarily used and accepted as a medium of exchange.”
The Revenue Ruling goes on to analyze two hypothetical situations, one involving a “hard fork” and the other involving an “airdrop.” The Revenue Ruling defines a hard fork as occurring “when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger” and “the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency.” It defines an airdrop as “a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers.”
In the first situation, a taxpayer holds units of a cryptocurrency on a distributed ledger that experiences a hard fork, but the event does not result in the taxpayer receiving the new cryptocurrency via an airdrop. In this situation, the Revenue Ruling makes clear that no taxable event has occurred under Section 61 of the Internal Revenue Code (the Code) because the taxpayer “did not receive units of the new cryptocurrency.”