There has been a significant uptick in IRS news involving cryptocurrency this spring, including the following highlights.
IRS clarifies prior guidance on hard forks and determining value
On April 9, the IRS released a Chief Counsel Advice (CCA) that clarifies two confusing points from cryptocurrency guidance issued during 2019.
First, the CCA clarifies Revenue Ruling 2019-24, which provides that a holder of cryptocurrency who experienced a hard fork followed by an airdrop had taxable income equal to the value of the cryptocurrency received if the taxpayer had dominion and control over the new cryptocurrency. Confusion existed regarding whether the revenue ruling’s holding applied only if a hard fork is followed by an airdrop. The CCA clarifies that “the specific means by which the new cryptocurrency is distributed or otherwise made available to a taxpayer following a hard fork does not affect the Revenue Ruling’s holding.” Accordingly, the holding in Revenue Ruling 2019-24 applies in cases when there is a hard fork that is not followed by an airdrop, which was the typical case and the situation surrounding Bitcoin hard forks in 2017 and 2018.
The CCA also clarifies an IRS frequently asked question (FAQ) published on the IRS website in 2019 relating to determining a cryptocurrency’s fair market value. Specifically, FAQ 27 provides that in a peer-to-peer transaction, one acceptable method to determine a cryptocurrency’s fair market value is to use a “cryptocurrency or blockchain explorer.” This language was unclear, and in the recent memorandum the IRS clarifies that a taxpayer can use any reasonable method, such as a “cryptocurrency data aggregator,” to determine fair market value. This terminology is much clearer because although a blockchain explorer tracks transactions, it generally does not track value.