IRS Officials Discuss Promotional Airdrops, Pre-2018 Crypto-For-Crypto Exchanges, And Other Issues Not Addressed In Recent Tax Guidance

In October of 2019, the U.S. Internal Revenue Service issued the first new guidance on the taxation of cryptocurrency transactions in over five years (the "Guidance"). The Guidance comprising a revenue ruling (Rev. Rul. 2019-24) and answers to frequently asked questions on the taxation of cryptocurrency transactions published on the IRS's website.

This post discusses recent news reports of statements by officials with the IRS and the Treasury Department's Financial Crimes Enforcement Network (FinCEN) concerning issues not explicitly addressed in the Guidance.

Please refer to our earlier post for complete coverage of the Guidance.

Tax treatment of promotional airdrops remains uncertain Revenue Ruling 2019-24 indicated that cryptocurrency received in a hard fork would be taxable to the owner at the moment the new units of cryptocurrency issued in connection with the hard fork are "received" by the holder of the legacy cryptocurrency, which is generally the moment the units of the new cryptocurrency are "airdropped" to the legacy holder's wallet, provided the holder is able to exercise "dominion and control" over the units at that time.

Because the facts of the ruling involved a hard fork (i.e., a change in the protocol of a cryptocurrency's blockchain causing the creation of a new blockchain and, therefore, a new cryptocurrency), it was not clear whether the same rule would apply to airdrops of cryptocurrency received in other contexts. Airdrops may occur for promotional or marketing purposes by blockchain-focused startups in order to generate interest in the startup in connection with an upcoming ICO or to encourage mass adoption of the cryptocurrency. The coins may be distributed for free to holders of existing cryptocurrencies (such as Bitcoin or Ethereum), or may be "earned" by posting to social media or referring the cryptocurrency to other users.

An attorney in the IRS Office of the Associate Chief Counsel clarified in recent comments that promotional airdrops are not within the scope of Revenue Ruling 2019-24, but also noted that the IRS had not yet reached a decision on the tax treatment of these airdrops

Valuation and receipt issues for airdropped coins If coins of a new cryptocurrency are "received" for tax purposes, the owner of the cryptocurrency is required to include in its taxable income the fair market valuegenerally, the trading priceof the cryptocurrency at the moment of its receipt. An attorney for the IRS speaking before a...