The IRS has released new guidance on the tax treatment of cryptocurrency transactions applicable to taxpayers that hold cryptocurrencies as capital assets. The much-awaited guidance, released October 9, 2019, comes in the form of a new set of Frequently Asked Questions (FAQs) and a separate revenue ruling (Rev. Rul. 2019-24).

The FAQs cover a broad range of questions that have arisen over the investment in and use of cryptocurrencies like bitcoin, including the tax treatment of hard forks, determination of cost basis for a cryptocurrency sale, fair market valuations and even charitable contributions of cryptocurrencies. The separate Rev. Rul. 2019-24 focuses specifically on a couple of scenarios involving crypto hard forks.

Among highlights in the FAQs and the revenue ruling from a financial services perspective are the following:

  1. IRS is taking the position that hard forks that results in the receipt of new coins (changes in blockchain protocol that results in a split of the blockchain) are taxable events and the fair market value of the new coins is taxable as ordinary income on receipt, provided taxpayer has dominion and control.

  2. However, if there is a hard fork and a taxpayer does not receive the new coins (including if the exchange where a taxpayer has kept the original coins does not support the fork) there is no taxable event for that taxpayer.

  3. Coin-for-coin exchanges are taxable.

  4. Cost basis in cryptocurrency is generally the amount paid for in US dollars to acquire the coin or, in the case of a coin received following a hard fork, the amount included in income for the new coin as a result of the fork.

  5. When a taxpayer sells cryptocurrency and has purchased multiple “lots” at different times, the taxpayer can specifically identify lots that are treated as sold or rely on a FIFO methodology.

  6. Cryptocurrency received via a transaction facilitated by an exchange is generally valued based on the US dollar value recorded by the exchange for that transaction. For certain “off-chain” transactions facilitated by an exchange (presumably certain second-layer payment networks that may offset certain payments prior to recording on a distributed ledger), the guidance indicates that the FMV is the amount the cryptocurrency was trading for on the exchange at the date and time the transaction would have been recorded on the distributed ledger if it were an “on-chain” transaction.

  7. For peer-to-peer transactions not involving exchanges, fair market value “is determined as of the date and time the transaction is recorded on the distributed ledger, or [for off-chain transactions] would have been recorded on the ledger if it had been an on-chain transaction.” The IRS will accept as evidence of FMV a “cryptocurrency or blockchain explorer” that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.

  8. Capital gains and losses on sale or exchange of cryptocurrencies are reported on Form 8949 and Form 1040, Schedule D.

Note the focus on both date and time for FMV calculations. The IRS stated also that irrespective of whether a taxpayer received a payee statement such as a Form 1099, a taxable crypto transaction remains taxable. However, there was no other mention of tax information reporting obligations on the part of intermediaries.

More information may be found in the IRS Crypto Taxation FAQs and in Rev. Rul. 2019-24.