The IRS released Revenue Ruling 2019-24 last week, in a (rare) move to provide sane guidance concerning the handling of certain crypto transactions, specifically, hard forks and those followed by airdrops. The full text of the Ruling may be downloaded here.
Essentially, the Ruling points out that when a hard fork occurs but without the distribution (airdrop) of the new (forked) currency, no income is recognized. This seems entirely logical. However, when such a hard fork occurs followed by the airdrop of some amount of the new currency, the fair market value of the new (forked) currency at the time it is able to be redeemed (vs the time delivered) triggers recognition of ordinary income (not capital gain). This, then, becomes the basis for the block of new currency received.
The critical component here is the date and time at which the new currency may be utilized. There is no recognition of income until or unless the taxpayer has the ability to “exercise dominion and control” over the new currency. Thus, a waiting period before any portion of the new block may be traded means that until that period has expired, no income is recognized (this may not have any consequence during the course of the same tax year, but consider a period between December 30 of the current year and January 6 of the following year, where the income is recognized in the later tax year).
In related developments, the IRS has also released a new draft of the Form 1040 Schedule 1, which now asks specifically whether the taxpayer has engaged in any crypto transactions. It’s a yes/no disclosure, which may have audit implications if not answered truthfully.
In our practice, we inquire as to whether our clients have engaged in any crypto transactions, and handle such events as prescribed by law (as tedious as that may be, given the ever-shifting changes in guidance from the Service in these matters). Taxpayers should be aware that these transactions are likely to be even more closely scrutinized in the future as the Service (and states and municipalities) become more familiar with them and as the rules take more solid form.