IRS Releases Guidance on Taxation of Cryptocurrency:

IRS Releases Guidance on Taxation of Cryptocurrency

On October 9, 2019, the IRS released Revenue Ruling 2019-24 and a question and answer document (FAQs on Virtual Currency Transactions) that confirm when cryptocurrency owner’s taxes are due.  This has previously been a source of confusion.  In this ruling, the IRS ruled that a “hard fork” (i.e., when one cryptocurrency becomes two) will not cause taxpayers to recognize the income.  Taxpayers will recognize ordinary income, however, if they receive new units of cryptocurrency (i.e., an “airdrop”) following the hard fork.




A taxpayer’s adjusted basis for determining the gain or loss from the sale or exchange of property is generally the cost (with some adjustments). For property received as a gift, the donee’s basis depends on whether gain or loss is involved. For gains, the donee’s basis generally equals the adjusted basis in the hands of the donor (including any gift taxes paid as a result of the transfer). For losses, the donee’s basis generally equals the lower of (i) the fair market value (FMV) of the gift at the time of the transfer, or (ii) the donor’s adjusted basis at the time of transfer.


Ruling Analysis


The ruling concerns two fact patterns. In both scenarios, a taxpayer owns 50 units of a particular cryptocurrency, and the distributed ledger for each cryptocurrency undergoes a hard fork. 


1.  In the first fact pattern, the taxpayer does not receive any additional cryptocurrency following the hard fork. 


2.  In the second fact pattern, 25 units of a new cryptocurrency are airdropped to the taxpayer’s distributed ledger address, and the taxpayer can dispose of the new cryptocurrency. Following the airdrop, transactions related to each cryptocurrency are recorded on separate distributed ledgers (i.e., a distinctly distributed ledger for each cryptocurrency).


3.  The ruling clarifies a hard fork and airdrop timing issue that was previously unresolved. When a hard fork is followed by an airdrop, the cryptocurrency is generally received when it is recorded on the distributed ledger. A taxpayer that does not have dominion and control over the cryptocurrency, however, does not receive the cryptocurrency when the airdrop is recorded on the distributed ledger. The taxpayer is treated as receiving the cryptocurrency when the taxpayer later acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency. 


4.  The ruling characterizes the receipt of new cryptocurrency from a hard fork as ordinary income. When a hard fork does not result in an airdrop, the taxpayer does not have taxable income. Accordingly, if a hard fork occurs in Year 1, but taxpayers don’t gain access to the new cryptocurrency until Year 2, the ruling supports deferring recognition until Year 2. Taxpayers that previously reported taxable income from a fork may want to revisit their filed returns if they reported the income before having dominion and control over the underlying cryptocurrency.


The ruling provides another reminder that the IRS is focused on enforcement and collection activities in the cryptocurrency space. As the ruling only provides limited guidance on a limited set of issues, taxpayers should continue seeking assistance on the many remaining unanswered questions.

Jonathan Mishkin

Jonathan D. Mishkin focuses his practice on tax/trust controversy, estate planning, taxation and closely-held business advisory services with offices in Portland, Bend and West Linn. Drawing on deep experience gained inside both large accounting firms and large law firms, Mr. Mishkin capably advises and counsels individuals, families and their businesses, and trusts/trustees.


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