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IRS Issues Tax Guidance On Airdrops and Hard Forks

Internal Revenue Service (IRS) in the United States of America has released new guidance, specifying how tax laws can be applied to cryptocurrencies received by citizens as a result of network hard forks and token airdrops.

The IRS, in its supporting statement, described the updates as “part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area”

A draft has also been circulating recently of a new proposed IRS income form containing an important new question:

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

IRS (Form 1040, October 2019 Draft)

Revenue Ruling 2019-24‘ is one of the new pieces of such documentation from IRS and was published on October 9, along with its ‘Frequently Asked Questions’ and ‘Virtual Currencies’ pages.

2019-24 is also a follow-up to a 2014 notice which contained the institution’s first statement on cryptocurrencies, including how

“the IRS applied general principles of tax law to determine that virtual currency is property for federal tax purposes”.

IRS (Original 2014 Guidance)

Ruling 2019-24 starts with two questions, as to whether a cryptocurrency holder is liable to additional taxation:

  1. Due to value-appreciation of funds held, as a result of a cryptocurrency hard fork?
  2. Resulting new tokens received from post-fork airdrops, and their associated value?

This is concerning as it is unreasonable for a cryptocurrency owner to be constantly aware of the activity of projects to which they have not been aware of having bought into at the original point of (token) sale.

Airdrops are not always comprised of tokens directly related to, or controlled by, the networks they are based upon either.

When you bear in mind that almost anybody can make a fork from networks such as Ethereum, as evidenced by the capacity issues it is currently facing, the legislative consequences are far ranging and nigh-on unpoliceable.

As such, third parties with little to no regulation have the power to (inadvertently, or otherwise) criminalise token-holders.

Token holders are private citizens and will face the brunt of the law, however the organisations creating these tokens are often decentralized and are comparatively difficult to prosecute.

“THE IRS IS COMMITTED TO HELPING TAXPAYERS UNDERSTAND THEIR TAX OBLIGATIONS IN THIS EMERGING AREA… 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.”

Chuck Rettig (Commissioner, IRS)

Earlier this year, the bungling US regulator distributed over 10,000 letters addressed to citizens suspected of holding cryptocurrency balances of $20,000+ between 2013 and 2015.

This retroactive implementation of punishments for activities only recently deemed as crimes is a bad look for the organisation. It suggests a lack of forethought by the IRS as well as poor coordinatoin, and reinforces its identity as a team of out of touch beurocrats.

“some taxpayers with virtual currency transactions may have failed to report income and pay the resulting tax or did not report their transactions properly.

The IRS is actively addressing potential non-compliance in this area through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.”

IRS (Virtual Currency, 2019 Update)