October 2019 / United States

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.

On 1 October 2019, the US Treasury Department and the US Internal Revenue Service (IRS) issued Revenue Procedure 2019-40 to provide relief to certain US persons that own stock in certain foreign corporations in connection with the repeal of section 958(b)(4) of the US Internal Revenue Code (IRC). The IRS issued a related News Release (IR-2019-162) dated 1 October 2019. IRC section 318(a)(3) generally attributes stock owned by a person to a partnership, estate, trust, or corporation in which the person has an interest (so-called "downward attribution"). Before the repeal by the Tax Cuts and Jobs Act (TCJA), former IRC section 958(b)(4) provided that downward attribution should not apply so as to consider a US person as owning stock owned by a person who is not a US person (a "foreign person"). As a result of the repeal of IRC section 958(b)(4), stock of a foreign corporation owned by a foreign person can be attributed to a US person under IRC section 318(a)(3) for purposes of determining whether a US person is a US shareholder of the foreign corporation and, therefore, whether the foreign corporation is a controlled foreign corporation (CFC). Accordingly, US persons that were not previously treated as US shareholders may be treated as US shareholders, and foreign corporations that were not previously treated as CFCs may be treated as CFCs. Revenue Procedure 2019-40 provides guidance on determining whether certain foreign corporations are CFCs. Revenue Procedure 2019-40 also allows certain unrelated minority US shareholders to rely on specified financial statement information to calculate their subpart F and global intangible low-taxed income (GILTI) inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not available. Revenue Procedure 2019-40 also provides penalty relief to taxpayers in the specified circumstances. In addition, Revenue Procedure 2019-40 announces that the IRS intends to amend the instructions for IRS Form 5471 (Information Return of US Persons With Respect To Certain Foreign Corporations) to reduce the amount of information that certain unrelated minority US shareholders of the CFC are required to provide, and to limit the filing requirements of US shareholders who only constructively own stock of the CFC solely due to downward attribution from another person. Revenue Procedure 2019-40 generally applies from the last taxable year of a foreign corporation beginning before 1 January 2018 and to the taxable years of US shareholders in which or with which such taxable years of such foreign corporation end. Revenue Procedure 2019-40 will be in the IRS Internal Revenue Bulletin (IRB) as part of IRB 2019-43 dated 21 October 2019.