Internal Revenue Service Clarifies Tax Treatment of Crypto in Certain Instances

On October 9th, the IRS released a revenue procedure ruling and related FAQ, clarifying tax treatment related to cryptocurrency in certain instances. The ruling focused on tax treatment of hard forks and airdrops, and provided that in the event of a “hard fork”—where a cryptocurrency’s blockchain protocol is changed, or split, creating two distinct and incompatible versions of the underlying software—no taxable income is created, so long as no new cryptocurrency is received. In the event of an “airdrop”—where cryptocurrency is distributed, often without payment, to existing holders, or to a larger community—taxable income is generated. The amount of gross income in such an event would depend on the fair market value of the cryptocurrency when received, which could be referenced to determine the adjusted basis.

The IRS’s ruling also confirmed that capital gains tax rules are applicable to cryptocurrencies, and provided guidance on tax treatment for cryptocurrency received as compensation for services, noting that such income should be treated as self-employment income, which would be subject the recipient to self-employment taxes, including for Social Security and Medicare.

These clarifications likely come as a pleasant surprise to many in the cryptocurrency space, as the application of existing regulatory frameworks to cryptocurrencies has been somewhat murky. Hopefully, we’ll continue to see more releases like this one in the future.