On 9 October 2019, the US Internal Revenue Service (IRS) issued Revenue Ruling 2019-24 to provide guidance on the tax treatment of hard forks of cryptocurrency. The IRS also issued a related News Release (IR-2019-167) dated 9 October 2019.
Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.
A hard fork is unique to distributed ledger technology and occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy (i.e. existing) distributed ledger. A hard fork may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger.
An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. A hard fork followed by an airdrop results in the distribution of units of the new cryptocurrency to addresses containing the legacy cryptocurrency. A hard fork, however, is not always followed by an airdrop.
Revenue Ruling 2019-24 states that a taxpayer does not have gross income under section 61 of the US Internal Revenue Code (IRC) as a result of a hard fork of a cryptocurrency that the taxpayer owns if the hard fork is not followed by an airdrop, and thus the taxpayer does not receive units of a new cryptocurrency.
Revenue Ruling 2019-24 further states that a taxpayer has gross income, ordinary in character, as a result of a hard fork under IRC section 61 if an airdrop follows the hard fork, and thus the taxpayer receives units of new cryptocurrency.
Revenue Ruling 2019-24 will be published in the IRS Internal Revenue Bulletin (IRB) as part of IRB 2019-44 dated 28 October 2019.