Revenue Ruling 2019-24 and the related FAQs represent the first substantive guidance issued by the IRS on cryptocurrencies since the issuance of Notice 2014-21,5 which provided general guidance on the tax consequences of cryptocurrency transactions. Specifically, the 2014 Notice provided that cryptocurrencies should be treated as property rather than foreign currency for federal income tax purposes.
Revenue Ruling 2019-24 addresses issues that were not addressed by the 2014 Notice, and specifically sets out the income tax consequences of hard fork and airdrop transactions.
According to the new guidance: (i) a taxpayer does not recognize gross income as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive any units of a new cryptocurrency; however (ii) a taxpayer does recognize gross income, ordinary in character, as a result of an airdrop of new cryptocurrency following a hard fork if the taxpayer receives units of a new cryptocurrency. The amount of the gross income to be recognized is the fair market value of the new cryptocurrency. The key factor in the second situation is whether the taxpayer has “dominion” and “control” over the cryptocurrency. If the taxpayer is able to “transfer, sell, exchange, or otherwise dispose of the cryptocurrency,” which will be the case once the cryptocurrency has been recorded in the taxpayer’s distributed ledger, then the taxpayer has the requisite degree of dominion and control. In instances where the taxpayer’s ledger at a cryptocurrency exchange does not get credited because the exchange does not yet support the new cryptocurrency, the taxpayer does not have dominion until the new cryptocurrency is credited.
While virtual currency such as cryptocurrency is generally treated as a capital asset and taxed as such, airdropped units of new currency are taxed as ordinary income. The amount of ordinary income is the fair market value of the new units at the time the airdrop was made.