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IRS Revenue Ruling 2019–24

It’s been a long time since the father left in ‘69

It’s been a long time since Wu Tang had the chance to shine

It’s been a long time since we had diamonds, gold and drink Cristal wine

It’s been a long time of walking around here dumb, deaf, and blind

It’s been a long time since you had the Son of Man chant like golden wine

It’s been a long time

-Glaciers of Ice, Raekwon

Stop the music! It’s been a long time but on Oct 9th, 2019, the IRS had announced that, for the first time since 2014, it was providing new guidance for tax and accounting professionals who handle virtual currency filings. The new guidance can be found at Revenue Ruling 2019–24. The IRS had us wait five long years since the release of the infamous Notice 2014–21 just to answer a couple more unanswered questions. Man, talk about “taking your time!” Prior to this announcement, the IRS had not provided guidance on hard fork transactions, and tax “experts” and coin traders were debating its tax treatment. First, what is a hard fork? Well, I’m happy that you asked. A hard fork occurs when there is a split in a cryptocurrency’s blockchain. For example, Bitcoin had a hard fork in its blockchain on August 1, 2017, dividing into two separate coins: Bitcoin and Bitcoin Cash. Each holder of a Bitcoin unit was entitled to one Bitcoin Cash (BCH) unit. In this example, does a taxpayer have gross income as a result of this hard fork if the taxpayer receives units of new cryptocurrency

The answer is…….

Yes! According to Revenue Ruling 2019–24, if a taxpayer had cryptocurrencies that went through a hard fork followed by an airdrop, and they received new units of a cryptocurrency, then there is a gross income, and that is taxable. Dang, that means you must report the Bitcoin Cash units that you received back in 2017 on your 2017 tax returns! Consider filing an amended 2017 Federal Form 1040X, if you didn’t file the airdrop on your 2017 tax returns. You should report the Bitcoin Cash units as income using the fair market value at the time of receipt. This also becomes your cost basis of the property. You will report that as income for 2017 and pay the appropriate taxes. Don’t forget to amend your state tax returns too. When you sell those Bitcoin Cash units, you can subtract the proceeds from this cost basis, which is your capital gains or losses.

Here is where it gets fun. There is still debate on how to figure out the cost basis on the Bitcoin Cash example given. Taxes are such a cruel beast! One approach is taking the price at the time the forked coin becomes available to you in your wallet (whether on an exchange or a local wallet) as the price for basis and taxable income. However, there are some people that argue that the cost basis should be zero for forked coins and all upside should be considered capital gains. Since the IRS likes to take their sweet time on giving us guidance, you will get different answers from accountants. I’m a super conservative accountant, so I would urge my clients to choose the first approach. I would hate for the IRS to send my client a letter years later that the second more aggressive approach was incorrect. Make sure to document in detail about the approach used. This may save you big time in case of an audit.

If you are looking for any good news, if you did not receive new units of cryptocurrency after a hard fork, then you do not have gross income. In this situation, the hard fork is not taxable. I know that wasn’t the greatest news but at least I tried to leave on a positive note.

Here is a word from our lovely IRS Commissioner regarding the Revenue Ruling:

“The IRS is committed to helping taxpayers understand their tax obligations in this emerging area,” said IRS Commissioner Chuck Rettig.

“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.”

There are still many unanswered questions since 2014. The IRS is making cryptocurrency tax compliance with one of its top priorities. I predict that the IRS will be quicker to announce their next guidance. In my opinion, the IRS is preparing for war. There are a lot of people simply not filing their cryptocurrency reportable income on their tax returns. I predict that by 2023, there will be a lot of taxpayers that receive audit notices. Not to mention that the state tax departments will want their money too. It is best to be proactive and conservative. I highly recommend filing your taxable crypto transactions on your past, present and future tax returns.

Need help with your crypto taxes? Well, contact Jamaal "Crypto J" at jamaal@jstaxcorp.com!

Podcast: https://anchor.fm/36chamberscryptotaxes

Website: www.36chambersofcryptotaxes.com

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