IRS Releases New Guidance on Taxability for Certain Virtual Currency Transactions

December 2, 2019

Pay close attention, cryptocurrency investors: on Oct. 9, 2019, the IRS issued Revenue Ruling 2019-24 and 43 Questions and Answers, the first new guidance since 2014 on the taxability for certain virtual currency transactions.

While the Revenue Ruling focuses on how to treat hard forks and airdrops, the 43 Questions and Answers deal with a variety of common transactions, uses and valuation matters.

If you’re only marginally familiar with virtual currencies, including cryptocurrency, it may be helpful to begin with some preliminary definitions.

  • A hard fork signifies a distinct change in a cryptocurrency’s protocol that creates a permanent divergence from the previous distributed ledger. Sometimes, a hard fork can result in the creation of a new cryptocurrency, as well as a new distributed ledger. If a new cryptocurrency is created, then transactions involving the new cryptocurrency are recorded on the new distributed ledger, while transactions involving the former cryptocurrency continue to be recorded in the original distributed ledger.
  • If a hard fork does result in the creation of a new cryptocurrency, units of that new cryptocurrency may be distributed to multiple taxpayers automatically using a method called airdrop. While an airdrop will not always occur after a hard fork, if an airdrop does occur, then units of the new cryptocurrency are distributed to taxpayers who owned the legacy cryptocurrency. In this scenario, the taxpayer now owns and controls units from both cryptocurrencies, including the newly created cryptocurrency as well as the original cryptocurrency from before the hard fork.

Revenue Ruling 2019-24 aims to clarify the IRS position on whether and when hard forks and airdrops generate taxable income for the taxpayer. Before the ruling released on Oct. 9, 2019, there was discussion about if and when airdrops and hard fork transactions were considered taxable, with significant uncertainty as to when a taxpayer’s cryptocurrency generated additional income. The new guidance analyzes hard forks and the generation of income using two distinct scenarios, asking:

Does a taxpayer have income under §61 of the Internal Revenue Code…

If the taxpayer owns a cryptocurrency that experiences a hard fork, but the taxpayer does not receive or have access to those units?


If the taxpayer owns a cryptocurrency that either experiences a hard fork and receives an airdrop of a new cryptocurrency or receives an airdrop of a cryptocurrency?

In the first scenario, the IRS says that a taxpayer does not have income if they do not receive units of a cryptocurrency, even in the event of a hard fork. However, as soon as an airdrop occurs and the taxpayer receives units of the cryptocurrency, then the taxpayer does have taxable income. In the second scenario, the airdrop of new cryptocurrency directly to the taxpayer is considered an accession to wealth and ordinary income and should be valued at an amount consistent with the fair market value of cryptocurrency at the ‘day and time’ the units were received. In the Revenue Ruling, the IRS specifically references a 1955 tax court case, which states that an amount is taxable where there are

“instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”

For example, consider the first block in the creation of a hard fork, the point at which there is zero value. Can a taxpayer recognize a hard fork as income, before the hard fork creates a new cryptocurrency? Thus, in this scenario, when the hard fork was created, it had a value of zero, resulting in zero income. In this case, the holding period would have started and no income would be recognized until the digital asset from the hard fork is sold. This scenario is comparable to the result of making an 83(b) election on shares purchased or received that are not vested.

As with most Revenue Rulings issued by the IRS, Revenue Ruling 2019-24 seems to leave taxpayers with more questions than answers, particularly concerning the topics that this ruling failed to address. Luckily, the IRS also published 43 Questions and Answers on Oct. 9, 2019. This Q&A-style publication is a separate resource aiming to clarify how other common virtual currency transactions should be accounted for, primarily tackling the most challenging topics surrounding virtual currency and taxability. These Q&As specifically address taxpayers who hold virtual currency as a Capital Asset, which excludes those who hold virtual currency as a non-capital asset, though there still remains much debate and discussion as to taxpayers who hold virtual currency as a non-capital asset, on which the IRS may or may not choose to publish an opinion.

For instance, when the IRS references the “date and time” that the cryptocurrency is received within Revenue Ruling 2019-24, the IRS assumes that the value is the amount reflected on one or more exchanges as the actual value. But this begs several additional questions. What is the value if a digital asset airdrops 10,000,000 units, but only 1,000 units are transacted in a day? Is the value actually equal to the disclosed 1,000 unit transaction or is that value drastically overstated, since no one taxpayer could sell 100,000 at that day and time? Consideration could be made for valuing the cryptocurrency received using the same approach one might use for a thinly traded public company stock. Question 26 specifically addresses this situation, in which the IRS states that the taxpayer “must establish that the value you used is an accurate representation of the cryptocurrency’s fair market value.”

Let’s take a look at a few other significant topics covered in the 43 Questions and Answers:

In Question 27, the IRS addresses the valuation of services provided in exchange for the receipt of a cryptocurrency, whereby the cryptocurrency cannot be valued. The IRS indicates that the “fair 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.” As compared to transactions that occur when shares of a private company are transferred when services are provided, the IRS has ruled that the shares must be valued.

Question 29 provides clear guidance on soft forks, and specifically states that since “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.”As discussed above, perhaps a taxpayer may want to consider accelerating income prior to a value being established.

Question 34 tackles charitable giving, confirming that the same rules for shares of appreciated securities apply to virtual currency transfers to charitable organizations; however, finding a relative value on a published exchange for other items still poses a challenge to valuation. While the guidance confirms that charitable organizations can rely on valuations published on exchanges, rather than requiring a formal third party valuation (similar to what donors or privately held securities have to provide), if the digital asset is not listed on an exchange then the taxpayer and the charitable organization will need to consider other valuation methods (such as what might typically be conducted for gifts of privately held securities).

Question 38 provides clarity on how to identify the cost basis and units sold of virtual currency. The positive or negative implication of this guidance depends on a taxpayer’s trading volume and/or the positions the taxpayer took in the past. The IRS states that “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.” Within the Q&A the IRS recognizes that every purchase and sale of a digital asset that happens on-chain can be specifically identified, and they are expecting taxpayers to track their transactions as such.


Whenever the IRS releases guidance, the primary challenge becomes the need to address the tax positions taken in the past and determine whether they are contrary to the newly published positions. It is important to note that, while the IRS can publish Revenue Rulings and release Questions and Answers, these positions are not actual tax law; however, if audited, a taxpayer will need to defend why a position contrary to these published guidelines is proper. When evaluating their tax obligations for virtual currency, each taxpayer should consider three key questions:

  • Have we taken any positions contrary to the new Revenue Ruling or 43 Q&A’s?
  • Should we amend any prior-year tax returns?
  • How do we consider this guidance on a prospective basis?

At Aprio, we are working with our clients on reviewing positions as they compare and contrast to these most recently published guidelines. Let us know how we can assist you in deciphering your past and future tax positions.

Click here to contact Mitchell Kopelman.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.

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About the Author

Mitchell Kopelman

Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.

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