T Skevington and M Bacina
US Tax Office publishes new crypto guidance
For the first time in 5 years, the US Internal Revenue Service (IRS) has released new guidance to assist American taxpayers apply tax laws to crypto-related transactions. The guidance expands on the previous guidance issued in Notice 2014-21, and includes a revenue ruling and FAQ.
After announcing in May 2019 that the IRS would "soon" issue further guidance, this eagerly anticipated guidance has addressed a number of long-standing issues in the US. To that end, IRS Commissioner Chuck Rettig said that:
The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don't follow the rules.
Critically, the updated guidance has provided some much-needed guidance on how the IRS intends to apply tax legislation to hard forks and airdrops.
The updated guidance broadly provides that tax liability for a token received from an airdrop after a hard fort will crystalise when the new token is recorded on the blockchain, and if the taxpayer can actually access and control over the token. In the words of the revenue ruling:
A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.
The FAQ also provides at A21 that:
If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.
There is currently no guidance from the Australian Tax Office (ATO) on airdrops. At present, airdrops other than those occurring under an ICO may be treated as either a CGT asset or revenue asset received for no consideration. Consequently the full amount of any gain or loss may be need to be taken into account for tax filings.
In the press release, the IRS also reiterate that they are actively investigating non-compliance in the crypto space, and will be imposing penalties and interest, or seeking criminal prosecution, for those who fail to comply.
Piper Alderman's tax and blockchain team regularly advise businesses and individuals on cryptocurrency related taxation matters.