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IRS Provides Additional Guidance on the Tax Treatment of Cryptocurrency

Nearly five years after the release of the only published guidance in the area, on October 9, 2019, the Internal Revenue Service (the “IRS”) issued additional guidance on the tax treatment of cryptocurrency. The additional guidance was delivered in the form of Rev. Rul. 2019-24 (the “Crypto Ruling”) and a set of Frequently Asked Questions (“Crypto FAQs”) that applies the principles outlined in the IRS’ previously issued guidance (Notice 2014-21) to an expanded set of situations.

Rules May Apply Retroactively

The additional guidance was issued without specifying an effective date. Importantly, the Crypto Ruling and Crypto FAQs were described by the IRS as applying longstanding tax principles to cryptocurrency. As a result, it is likely that such guidance could apply retroactively, raising significant concerns for taxpayers and tax professionals. While additional guidance is expected to be issued, the timing and scope thereof remain unclear. Accordingly, taxpayers are urged to consider the possible implications of the new guidance as well as the principles underlying such new guidance to their particular circumstances.

The Crypto Ruling: “Hard Fork” and “Airdrop”

A “hard fork” in a cryptocurrency occurs when ledger cryptocurrency on a distributed ledger undergoes a protocol change and “forks,” or splits, into two. A hard fork may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy distributed ledger. Following the hard fork, transactions in the new cryptocurrency are recorded on the new distributed ledger, while the previous ledger continues to be used to record transactions in the old cryptocurrency. An “airdrop” is a method of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. If a hard fork is followed by an airdrop, units of the new cryptocurrency are distributed to addresses containing the former cryptocurrency. However, hard forks are not always followed by airdrops. Cryptocurrency from an airdrop generally is received on the date and at the time it is recorded on the distributed ledger.

Under the Crypto Ruling, if the distributed ledger (such as a blockchain) of a cryptocurrency undergoes a hard fork that results in the creation of a new cryptocurrency and a holder of the original cryptocurrency does not receive units of the new cryptocurrency in connection with the hard fork by means of an airdrop (or otherwise), then the holder does not have ordinary income as a result. Conversely, the holder will recognize ordinary income if as a result of an airdrop following a hard fork, such holder receives units of a new cryptocurrency. The amount of such ordinary income equals the fair market value of the new units of cryptocurrency and such income must be reported for U.S. federal income tax purposes in the taxable year during which the airdrop is recorded on the distributed ledger.

The Crypto Ruling provides that the holder is not required to include in income new cryptocurrency airdropped after the creation of a hard fork until the holder has “dominion and control” over the new units of cryptocurrency. For these purposes, dominion and control are generally defined as the “ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency.” The IRS provides that a holder does not have dominion and control over cryptocurrency when the address to which the cryptocurrency is airdropped is contained in a wallet managed through a cryptocurrency exchange and the cryptocurrency exchange does not support the newly created cryptocurrency such that the airdropped cryptocurrency is not immediately credited to the holder’s account at the cryptocurrency exchange. When the holder later acquires “dominion and control” of the cryptocurrency, the holder is treated as receiving the cryptocurrency at such later time.

The Crypto FAQs

The Crypto FAQs address transactions involving virtual currency by applying longstanding tax principles to cryptocurrency. The following is an overview of some of the issues addressed in the Crypto FAQs.

Identifying the Units of Cryptocurrency Sold or Exchanged

If a taxpayer acquires multiple units of the same kind of cryptocurrency at different prices and then sells or exchanges some of that cryptocurrency, the units will be deemed to be sold on a first in, first out (FIFO) basis in the absence of specific identification. A taxpayer can identify a specific unit of cryptocurrency by documenting its unique digital identifier, such as a private key, public key and address, or by records showing the transaction information for all units of the cryptocurrency held in a single account, wallet or address. This information must show (1) the date and time each unit was acquired, (2) the taxpayer’s basis and the fair market value of that unit at the time each unit was acquired, (3) the date and time each unit was sold, and (4) the fair market value of each unit when sold and the amount of money or the value of property received for each unit.

Determining Fair Market Value of Cryptocurrency

The Crypto FAQs state that the value of cryptocurrency received in a transaction facilitated by a cryptocurrency exchange is the amount that is recorded by the cryptocurrency exchange for that transaction in U.S. dollars. If a transaction facilitated by a centralized or decentralized cryptocurrency exchange 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, i.e., a transaction recorded on a distributed ledger.

If a taxpayer receives cryptocurrency in a transaction not facilitated by a cryptocurrency exchange, such as via a peer-to-peer transaction, 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. In addition, in lieu of an “explorer value,” the Crypto FAQs permit the taxpayer to establish the value of the asset under general valuation principles.

Recognizing Gain and Loss, and Determining Basis

Cryptocurrency is treated as property for U.S. federal income tax purposes, rather than as currency, so the longstanding principles that apply to transactions involving property also apply to transactions involving cryptocurrency. Consistent with that approach and the guidance under Notice 2014-21, a taxpayer will recognize gain or loss when the taxpayer sells cryptocurrency for real currency, uses cryptocurrency to pay someone for performing services, or exchanges cryptocurrency for other property.

If a taxpayer receives cryptocurrency as payment for the performance of services, such taxpayer will recognize income equal to the fair market value of the cryptocurrency in U.S. dollars at the time it is received and will have a corresponding tax basis.

Gifts and Donations to Charity

The rules that apply to gifts of property and donations of property to charity apply to gifts of cryptocurrency and donations of cryptocurrency. Thus, cryptocurrency gifts to charitable organizations will not be recognized as income, gain or loss. Such donations entitle the taxpayer to a charitable contribution deduction.

Record Keeping

Consistent with general principles of tax law, taxpayers are required to maintain detailed records to establish positions taken on their tax returns. Taxpayers will need to document all of their receipts, sales, exchanges, or other dispositions of cryptocurrency and its fair market value in U.S. dollars at the time of each transaction.


Mintz lawyers are available to assist with any questions you may have regarding these developments. For further guidance on these matters, please contact the Mintz lawyer with whom you usually work or the authors listed above.


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David K. Salamon is an Associate at Mintz. He advises clients across a variety of industries on complex tax issues pertaining to mergers, acquisitions, restructuring, and additional matters.