IRS Revenue Ruling 2019-24

26 CFR 1.61-1: Gross income.
(Also §§ 61, 451, 1011.)
Rev. Rul. 2019-24

ISSUES
(1) Does a taxpayer have gross income under § 61 of the Internal Revenue Code
(Code) as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer
does not receive units of a new cryptocurrency?
(2) Does a taxpayer have gross income under § 61 as a result of an airdrop of a
new cryptocurrency following a hard fork if the taxpayer receives units of new
cryptocurrency?

BACKGROUND
Virtual currency is a digital representation of value that functions as a medium of
exchange, a unit of account, and a store of value other than a representation of the
United States dollar or a foreign currency. Foreign currency is the coin and paper
money of a country other than the United States that is designated as legal tender,
circulates, and is customarily used and accepted as a medium of exchange in the
country of issuance. See 31 C.F.R. § 1010.100(m).

Cryptocurrency is a type of virtual currency that utilizes cryptography to secure
transactions that are digitally recorded on a distributed ledger, such as a blockchain.
Units of cryptocurrency are generally referred to as coins or tokens. Distributed ledger
technology uses independent digital systems to record, share, and synchronize
transactions, the details of which are recorded in multiple places at the same time with
no central data store or administration functionality.

A hard fork is unique to distributed ledger technology and occurs when a
cryptocurrency on a distributed ledger undergoes a protocol change resulting in a
permanent diversion from the legacy or existing distributed ledger. A hard fork may
result in the creation of a new cryptocurrency on a new distributed ledger in addition to
the legacy cryptocurrency on the legacy distributed ledger. Following a hard fork,
transactions involving the new cryptocurrency are recorded on the new distributed
ledger and transactions involving the legacy cryptocurrency continue to be recorded on
the legacy distributed ledger.

An airdrop is a means of distributing units of a cryptocurrency to the distributed
ledger addresses of multiple taxpayers. A hard fork followed by an airdrop results in the
distribution of units of the new cryptocurrency to addresses containing the legacy
cryptocurrency. However, a hard fork is not always followed by an airdrop.
Cryptocurrency from an airdrop generally is received on the date and at the time
it is recorded on the distributed ledger. However, a taxpayer may constructively receive
cryptocurrency prior to the airdrop being recorded on the distributed ledger. A taxpayer
does not have receipt of cryptocurrency when the airdrop is recorded on the distributed
ledger if the taxpayer is not able to exercise dominion and control over the cryptocurrency.
For example, a taxpayer does not have dominion and control if the address to which the
cryptocurrency is airdropped is contained in a wallet managed
through a cryptocurrency exchange and the cryptocurrency exchange does not support
the newly-created cryptocurrency such that the airdropped cryptocurrency is not
immediately credited to the taxpayer’s account at the cryptocurrency exchange. If the
taxpayer later acquires the ability to transfer, sell, exchange, or otherwise dispose of the
cryptocurrency, the taxpayer is treated as receiving the cryptocurrency at that time.

FACTS
Situation 1: A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the
distributed ledger for Crypto M experiences a hard fork, resulting in the creation of
Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or
controlled by A.

Situation 2: B holds 50 units of Crypto R, a cryptocurrency. On Date 2, the
distributed ledger for Crypto R experiences a hard fork, resulting in the creation of
Crypto S. On that date, 25 units of Crypto S are airdropped to B’s distributed ledger
address and B has the ability to dispose of Crypto S immediately following the airdrop.
B now holds 50 units of Crypto R and 25 units of Crypto S. The airdrop of Crypto S is
recorded on the distributed ledger on Date 2 at Time 1 and, at that date and time, the
fair market value of B’s 25 units of Crypto S is $50. B receives the Crypto S solely
because B owns Crypto R at the time of the hard fork. After the airdrop, transactions
involving Crypto S are recorded on the new distributed ledger and transactions involving
Crypto R continue to be recorded on the legacy distributed ledger.

LAW AND ANALYSIS
Section 61(a)(3) provides that, except as otherwise provided by law, gross
income means all income from whatever source derived, including gains from dealings
in property. Under § 61, all gains or undeniable accessions to wealth, clearly realized,
over which a taxpayer has complete dominion, are included in gross income. See
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955). In general, income is
ordinary unless it is gain from the sale or exchange of a capital asset or a special rule
applies. See, e.g., §§ 1222, 1231, 1234A.
Section 1011 of the Code provides that a taxpayer’s adjusted basis for
determining the gain or loss from the sale or exchange of property is the cost or other
basis determined under § 1012 of the Code, adjusted to the extent provided under
§ 1016 of the Code. When a taxpayer receives property that is not purchased, unless
otherwise provided in the Code, the taxpayer’s basis in the property received is
determined by reference to the amount included in gross income, which is the fair
market value of the property when the property is received. See generally §§ 61 and
1011; see also § 1.61-2(d)(2)(i).
Section 451 of the Code provides that a taxpayer using the cash method of
accounting includes an amount in gross income in the taxable year it is actually or
constructively received. See §§ 1.451-1 and 1.451-2. A taxpayer using an accrual
method of accounting generally includes an amount in gross income no later than the
taxable year in which all the events have occurred which fix the right to receive such
amount. See § 451.

Situation 1: A did not receive units of the new cryptocurrency, Crypto N, from the
hard fork; therefore, A does not have an accession to wealth and does not have gross
income under § 61 as a result of the hard fork.

Situation 2: B received a new asset, Crypto S, in the airdrop following the hard
fork; therefore, B has an accession to wealth and has ordinary income in the taxable
year in which the Crypto S is received. See §§ 61 and 451. B has dominion and control
of Crypto S at the time of the airdrop, when it is recorded on the distributed ledger,
because B immediately has the ability to dispose of Crypto S. The amount included in
gross income is $50, the fair market value of B’s 25 units of Crypto S when the airdrop
is recorded on the distributed ledger. B’s basis in Crypto S is $50, the amount of
income recognized. See §§ 61, 1011, and 1.61-2(d)(2)(i).

HOLDINGS
(1) A taxpayer does not have gross income under § 61 as a result of a hard fork
of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new
cryptocurrency.

(2) A taxpayer has gross income, ordinary in character, under § 61 as a result of
an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of
new cryptocurrency.

DRAFTING INFORMATION
The principal author of this revenue ruling is Suzanne R. Sinno of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
the revenue ruling, contact Ms. Sinno at (202) 317-4718 (not a toll-free number).

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