The IRS has released Revenue Ruling 2019-24 on virtual currency tax issues. Specifically, this ruling addresses income tax consequences of a “hard fork” of a virtual currency. This new Revenue Ruling 2019-24 is the first new IRS guidance on virtual currency tax issues since the IRS released Notice 2014-21.
As background, IRS Notice 2014-21 stated that virtual currency is treated as property—not as currency—for federal tax purposes. So, a taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency. But, the fair market value of virtual currency that is mined by a taxpayer is included in that taxpayer’s gross income.
This new Revenue Ruling 2019-24 first explains that cryptocurrency is a type of virtual currency that uses cryptography to store the virtual currency transactions on a distributed ledger. From time to time, the rules that are used to validate cryptocurrency transactions are changed. Sometimes the rules are changed to address a security issue, and sometimes the rules are changed to add new features or functionality. When the rules are changed so that new transactions (or old transactions) can’t be validated without updating to the latest version of the software, that’s referred to as a hard fork.
If a taxpayer receives units of a new cryptocurrency as a result of a hard fork, Revenue Ruling 2019-24 states that the taxpayer has gross income in the taxable year in which that new currency is received. If the taxpayer did not receive units of a new cryptocurrency as a result of the hard fork, Revenue Ruling 2019-24 states that the taxpayer doesn’t have gross income from that event.