This past month, the Service filled in one more piece of the puzzle. In a memorandum dated March 22, the Service explained its view of the consequences of a cryptocurrency hard fork. A hard fork is a software update effectively branching a cryptocurrency into two incompatible blockchain networks. This creates a new cryptocurrency if both networks continue to operate, in which case the event is termed a contentious hard fork, a persistent chain split or a schism.
The fork of Bitcoin Cash from Bitcoin in August of is a prominent example of a contentious hard fork. The previous guidance on the issue, Revenue Ruling , addressed the consequences of a hard fork followed by an airdrop. Cryptocurrencies also generate taxable gain or loss when disposed of in a taxable event.
This has left many taxpayers, including cryptocurrency exchanges, and practitioners at a loss as to how to apply such general principles to crypto concepts and transactions that often have no clear analog in the non-virtual world.
For example, the Notice explained that to the extent a taxpayer received virtual currency as payment for goods or services, the taxpayer must, in computing gross income, include the fair market value of such virtual currency as of the date the virtual currency was received. The Notice stated that the basis of such virtual currency received as payment is the fair market value of the virtual currency at the time of receipt.
After years without any further substantive guidance, in late , the IRS released this Revenue Ruling to provide taxpayers guidance regarding the treatment of hard forks that create a new cryptocurrency and air drops two types of cryptocurrency-originating transactions , as well as acceptable methods for calculating and assigning cost basis to such transactions. Concurrent with the Revenue Ruling, the IRS issued 43 FAQs that addressed a wide range of issues, often relying on general tax principles to address the tax treatment of transactions and events involving cryptocurrencies.
From a technical perspective and purely by how cryptocurrency technology functions, the owner of an original cryptocurrency coin will automatically receive a forked coin that results from a hard fork that creates the new forked currency. But whether or not the owner received a forked coin for tax purposes as the result of a hard fork depends on whether the owner has dominion and control over the new cryptocurrency. This is further explained by the Guidance discussed below.
Based on the analysis in the Revenue Ruling, the IRS suggests that, for all purposes, with respect to hard forks that create a new currency, original coin owners may come to own forked coins only if they later receive them through an airdrop or another similar type of external transfer. This analysis failed to address the fact that an airdrop may not even have any immediate tax consequences to a person in receipt of a new currency, as the person in receipt must have dominion and control of the respective digital wallet in order to experience the required accession to wealth.
Further, an airdrop can, and often does, occur independent of a hard fork, e. From the language of the Guidance, it appears that the Service is attempting to provide guidance with respect to one of the facts that was ignored by the Revenue Ruling, i. In addressing the specific question regarding whether the receipt of BCH following the BTC hard fork constituted gross income to the taxpayer, the Guidance presents two different scenarios. In the first scenario, Situation 1 , the taxpayer directly holds the private key to a unit of BTC and has immediate control of the BCH following the BTC hard fork, and can initiate transactions with it.
In accordance with the Revenue Ruling, the Guidance concludes that the BCH received by the taxpayer from the BTC hard fork resulted in gross income to the taxpayer because the taxpayer immediately had dominion and control over the BCH and therefore had an accession to wealth under Section In the second scenario, Situation 2 , the taxpayer does not hold and have control over the key to the distributed ledger following the BTC hard fork. The Guidance provides that at such later time the taxpayer does have an accession to wealth because the taxpayer at that point has dominion and control over BCH.
Relying on the same general tax principles first espoused in the Notice and then reiterated in the Revenue Ruling, the Guidance finds that a taxpayer may only have gross income in connection with the receipt of a new cryptocurrency following a hard fork that created the new currency if and when the taxpayer actually has dominion and control over the new cryptocurrency.
This implication is incorrect because, based on how cryptocurrency technology functions and from a purely technical perspective, owners of the original cryptocurrency will automatically receive a new forked currency that results from such a hard fork itself, with or without an airdrop or similar type of transfer. Whether or not an owner has received the new forked currency for tax purposes is a distinct issue. The Revenue Ruling, however, makes no such distinction and simply ignores the automatic receipt of a new currency that results from such a hard fork.
Moreover, scenarios where taxpayers receive an airdrop of cryptocurrency independent of a hard fork are also not addressed. Send Print Report. Randy Buchanan. Sarah Paul.
Later, if you sold, traded, or exchanged the coins for goods or services, you would have to report the coins as either short- or long-term capital gains. However, airdrops are different. An airdrop is a promotion by exchanges or cryptos where new coins are given free to select wallets. If you receive any cryptos from an airdrop, they would count as income, just like if you mined the coins.
Import data from exchanges and file your taxes easily. Log in Get Started. We don't accept any new clients for tax season, see you next year! Subscribe to newsletter. The amount included in income is the fair market value of the cryptocurrency when you received it.
You have received the cryptocurrency when you can transfer, sell, exchange, or otherwise dispose of it, which is generally the date and time the airdrop is recorded on the distributed ledger. See Rev. If you receive cryptocurrency in a transaction facilitated by a cryptocurrency exchange, the value of the cryptocurrency is the amount that is recorded by the cryptocurrency exchange for that transaction in U.
If the transaction is facilitated by a centralized or decentralized cryptocurrency exchange but is not recorded on a distributed ledger or is otherwise an off-chain transaction, then the fair market value is the amount the cryptocurrency was trading for on the exchange at the date and time the transaction would have been recorded on the ledger if it had been an on-chain transaction. If you receive cryptocurrency in a peer-to-peer transaction or some other transaction not facilitated by a cryptocurrency exchange, the fair market value of the cryptocurrency is determined as of the date and time the transaction is recorded on the distributed ledger, or would have been recorded on the ledger if it had been an on-chain transaction.
The IRS will accept as evidence of fair market value the value as determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time. When you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, then the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs.
Your holding period begins the day after it is received. For more information on holding periods, see Publication , Sales and Other Dispositions of Assets. A soft fork occurs when a distributed ledger undergoes a protocol change that does not result in a diversion of the ledger and thus does not result in the creation of a new cryptocurrency. Because soft forks do not result in you receiving new cryptocurrency, you will be in the same position you were in prior to the soft fork, meaning that the soft fork will not result in any income to you.
If you receive virtual currency as a bona fide gift, you will not recognize income until you sell, exchange, or otherwise dispose of that virtual currency. For more information about gifts, see Publication , Survivors, Executors, and Administrators. Your basis in virtual currency received as a bona fide gift differs depending on whether you will have a gain or a loss when you sell or dispose of it.
For more information on basis of property received as a gift, see Publication , Basis of Assets. Your holding period in virtual currency received as a gift includes the time that the virtual currency was held by the person from whom you received the gift. If you donate virtual currency to a charitable organization described in Internal Revenue Code Section c , you will not recognize income, gain, or loss from the donation. For more information on charitable contributions, see Publication , Charitable Contributions.
Your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year. For more information on charitable contribution deductions, see Publication , Charitable Contributions.
The signature of the donee on Form does not represent concurrence in the appraised value of the contributed property. The signature represents acknowledgement of receipt of the property described in Form on the date specified and that the donee understands the information reporting requirements imposed by section L on dispositions of the donated property see discussion of Form in FAQ See Form instructions for more information.
See Publication , Charitable Contributions , for more information. Tax-exempt charity responsibilities include the following:. If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event, even if you receive an information return from an exchange or platform as a result of the transfer.
You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.
This information must show 1 the date and time each unit was acquired, 2 your basis and the fair market value of each unit at the time it was acquired, 3 the date and time each unit was sold, exchanged, or otherwise disposed of, and 4 the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.
If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out FIFO basis.
You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return. You must report most sales and other capital transactions and calculate capital gain or loss in accordance with IRS forms and instructions, including on Form , Sales and Other Dispositions of Capital Assets , and then summarize capital gains and deductible capital losses on Form , Schedule D, Capital Gains and Losses.
You must report ordinary income from virtual currency on Form , U. Information on virtual currency is available at IRS. Many questions about the tax treatment of virtual currency can be answered by referring to Notice PDF and Rev. The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the positions taken on tax returns.
You should therefore maintain, for example, records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency. More In File. What is virtual currency? How is virtual currency treated for Federal income tax purposes? What is cryptocurrency? Will I recognize a gain or loss when I sell my virtual currency for real currency?
The Form asks whether at any time during , I received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. During , I purchased virtual currency with real currency and had no other virtual currency transactions during the year. Must I answer yes to the Form question?
The Form asks whether at any time during , I received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency. How do I answer the question on the Form ? How do I determine if my gain or loss is a short-term or long-term capital gain or loss? How do I calculate my gain or loss when I sell virtual currency for real currency? How do I determine my basis in virtual currency I purchased with real currency?
Do I have income if I provide someone with a service and that person pays me with virtual currency? Does virtual currency received by an independent contractor for performing services constitute self-employment income? Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?
How do I calculate my income if I provide a service and receive payment in virtual currency? Will I recognize a gain or loss if I pay someone with virtual currency for providing me with a service? How do I calculate my gain or loss when I pay for services using virtual currency? Will I recognize a gain or loss if I exchange my virtual currency for other property?
How do I calculate my gain or loss when I exchange my virtual currency for other property? Will I recognize a gain or loss if I sell or exchange property other than U. How do I calculate my gain or loss when I exchange property for virtual currency? How do I determine my basis in virtual currency that I have received in exchange for property? One of my cryptocurrencies went through a hard fork but I did not receive any new cryptocurrency.
Do I have income? One of my cryptocurrencies went through a hard fork followed by an airdrop and I received new cryptocurrency. How do I calculate my income from cryptocurrency I received following a hard fork? How do I determine my basis in cryptocurrency I received following a hard fork?
I received cryptocurrency through a platform for trading cryptocurrency; that is, through a cryptocurrency exchange. I received cryptocurrency in a peer-to-peer transaction or some other type of transaction that did not involve a cryptocurrency exchange. I received cryptocurrency that does not have a published value in exchange for property or services.
In , the IRS held in Revenue Ruling that. crptocurrencyupdates.com › irs-clarifies-taxes-on-cryptocurrency-hard-forks-and-ai. An IRS memorandum reconfirms that hard forked coins are taxed at the time you gain dominion and control & not when the fork occurs.