The Internal Revenue Service (IRS) has published new guidelines for taxpayers who use cryptocurrencies. Already in 2014, when the IRS issued its guidelines it became clear that for tax purposes, virtual currencies – including cryptocurrencies – should be treated as capital assets. The main idea that supports such an approach is that they are convertible into cash. In other words, capital gains tax rules apply to all gains or losses attributable to digital currency.The freshest Revenue Ruling contains guidance that specifically addresses two questions about the taxation of assets that were obtained after the hard fork and as a result of an airdrop.Nevertheless, before we dive deeper into these issues, let us remind you about some peculiarities of these events in the crypto world mean.While
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The Internal Revenue Service (IRS) has published new guidelines for taxpayers who use cryptocurrencies. Already in 2014, when the IRS issued its guidelines it became clear that for tax purposes, virtual currencies – including cryptocurrencies – should be treated as capital assets. The main idea that supports such an approach is that they are convertible into cash. In other words, capital gains tax rules apply to all gains or losses attributable to digital currency.
The freshest Revenue Ruling contains guidance that specifically addresses two questions about the taxation of assets that were obtained after the hard fork and as a result of an airdrop.
Nevertheless, before we dive deeper into these issues, let us remind you about some peculiarities of these events in the crypto world mean.
While hard fork presupposes serious changes introduced to a network’s protocol, it may lead to such a result as the creation of new crypto. As there are two networks after such a fork, there are two cryptos.
As for an airdrop, it is a practice of sending coins to distributed ledger addresses. Such an even my occur after a hard fork. Some units of new cryptocurrency may be distributed to the addresses that keep the original crypto.
Is It Constructive Receipt?
Constructive receipt can be explained by this simple analogy: if your manager gave you your paycheck and put it away and absolutely forgot about it, never cashing it, you still needed to pay taxes on that paycheck in the eyes of the law, despite never having cashed it. In other words, the concept of Constructive Receipt presupposes that your income should be taxed just after it becomes available. You cannot turn your back on income to avoid taxes.
Here’s where it gets complicated: an airdrop does not always follow a hard fork. This is where the concept of Constructive Receipt comes in: even if there has yet to be an airdrop after a hard fork, a taxpayer may be said to have constructively received cryptocurrency before the airdrop is recorded on the distributed ledger.
Two Questions about Hard Fork and Taxation
The two questions specifically addressed in the most recent Revenue Ruling are, therefore:
1) If a person gets units of a newly created crypto as a result of an airdrop that follows a hard fork, can it be considered to be gross income under §61 of the Code?
2) Or if a person does not get any units of a newly created crypto following a hard fork of crypto he holds, can it be said that this person has gross income under the same provisions?
According to the Revenue Ruling, it is obvious that a taxpayer does not receive any gross income after a hard fork if he doesn’t get new cryptocurrency. On the other hand, the taxpayer has gross income, if he gets new crypto as the result of an airdrop which takes place following a hard fork.
However, there are no such questions in the case of a soft fork. As when it occurs, it does not lead to receiving incomes.