On October 9, 2019, the Internal Revenue Service released the first new specific tax guidance regarding virtual currency since 2014 as part of its wider effort to educate taxpayers and enforce the tax laws in this rapidly changing area. The new guidance, in the form of Revenue Ruling 2019-24 and a set of Frequently Asked Questions posted to its website, reiterates the Service’s position that virtual currency, including cryptocurrency such as Bitcoin, is property for federal income tax purposes.
The new FAQs supplement the 2014 Notice and explain the applicability of general tax principles to taxpayers holding virtual currency as a capital asset under various scenarios. According to the new IRS guidance:
- Virtual currency is not “real” currency, but is a digital representation of value that functions as a unit of account or medium of exchange. Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger.
- A taxpayer will recognize gain or loss when the virtual currency is sold for real currency, as with any other capital asset. The basis and holding period of the virtual currency will be determined under general tax principles.
- A taxpayer will recognize gain or loss when the virtual currency is exchanged for other property, including another virtual currency.
- If a taxpayer receives virtual currency in exchange for services provided as an employee or independent contractor, the taxpayer will recognize wage or self-employment income equal to the fair market value of the virtual currency received, measured in US dollars at the time the transaction is recorded on the distribution ledger.
- If a taxpayer pays for goods or services with virtual currency, the taxpayer will recognize capital gain or loss as if the taxpayer sold the virtual currency for the fair market value of the goods or services the taxpayer received.
- The general tax principles applicable to gifting and charitable contributions of capital assets apply to virtual currency.
- A hard fork by itself does not result in income to the taxpayer, but if the hard fork is followed by an air drop of new cryptocurrency to the taxpayer, the taxpayer will have ordinary income equal to the value of the new cryptocurrency when it is received (this is also covered by new Rev. Rul. 2019-24).
- Taxpayers should maintain records documenting receipts, sales, exchanges or other dispositions of virtual currency, and its fair market value.
In addition to this guidance, recent drafts of the 2019 federal individual tax return require the taxpayer to state if he or she has been involved in a virtual currency transaction.
As stated above, the new guidance is applicable to taxpayers who hold virtual currency as a capital asset. This likely covers the vast majority of taxpayers who own cryptocurrency, many of whom have received correspondence from the IRS under an enforcement campaign targeting cryptocurrency holders. Taxpayers in the trade or business of trading cryptocurrency, or who intend to create a cryptocurrency, are not specifically covered by this IRS guidance and must continue to apply existing tax principles.
KMK Legal Alerts and Blog Posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.
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Mark Sims practices in the Business Representation & Transactions Group and works primarily in the federal income tax, business planning and healthcare areas. Mark's federal tax practice involves individual, corporate, S ...
Zach Gubser practices in the firm's Business Representation and Transactions Group, working primarily in federal income tax.
Zach's federal tax practice involves partnership, S corporation, corporate and individual income tax ...
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