Taxpayers who are confused about how to report their cryptocurrency after a hard fork are in for some good news. The IRS this week released new guidance for affected virtual currencies, hopefully clearing up any tax-related confusion that could arise.
Now, even if you have a digital wallet loaded to the brim with cryptocurrency, you may not be entirely sure what a “cryptocurrency hard fork” is. The short answer is that a hard fork occurs when an established virtual currency splits into two separate currencies due a significant change in the underlying code: the new currency uses the new code, and the old currency uses the old code (Rev. Rul. 2019-24).
Bitcoin Cash is probably the most famous example of a cryptocurrency hard fork. Here’s what happened: Bitcoin, by design, has a hard cap on the number of coins that can ever be mined. (Think gold-backed currency: The finite nature of the resource is intrinsic to how value is derived.) Some investors wanted to increase that cap; others didn’t. Support for increasing the cap of mineable coins grew to the point that the Bitcoin code was changed, resulting in the new Bitcoin Cash existing alongside the original Bitcoin currency.
As you might have guessed, people had a few questions when this happened in late 2017. It’s a shame that investors didn’t have clear tax guidance at the time, but the IRS has stepped in to help taxpayers in 2019. (After all, this was an uncharted frontier in cryptocurrency investment.)
Now, the IRS is unjustly viewed as a government bogeymen by a lot of people. While some believe the agency is dedicated to “stealing their money,” the reality is that one of the primary IRS missions is to encourage voluntary compliance with tax laws. One way they achieve that goal by disseminating educational resources, and the latest virtual currency guidance is a perfect example of that type of outreach.
Taking the form of an updated frequently asked questions (FAQ) page and revenue ruling (2019-24), the IRS said the updates specifically addressed cryptocurrency hard forks. The FAQ provides answers on a host of fork-related issues, like whether a fork results in taxable income based on the receipt of new cryptocurrency and how to determine income and basis when applicable.
If you’re one of the many cryptocurrency investors—or you have clients who have taken the plunge—this new guidance should prove particularly useful.