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  • Writer's pictureKathryn Bruns, CPA

Anyone play with Virtual Currency?

Happy Friday !

Things like Virtual Currency drive CPAs nuts. New technology means ambiguity for interpreting how the tax laws apply. The IRS is famous for taking it's sweet time issuing guidance on "new topics". For those who deal with virtual currency (example - Bitcoin), you may find this recent guidance from the IRS helpful and/or interesting. may just find it confusing. "Hard forks" and "airdrops" are casually mentioned quite a few times. Have fun !

Cross References - Rev. Rul. 2019-24

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 U.S. dollar or a foreign currency. 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.

A hard fork 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.

Constructive receipt. A taxpayer generally has constructive receipt of cryptocurrency from an airdrop 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 if the taxpayer is able to exercise dominion and control over the cryptocurrency. Likewise, 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 which does not support the newly-created cryptocurrency such that the airdropped cryptocurrency is not immediately credited to the taxpayer- s account. If the taxpayer later acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency, the taxpayer has constructive receipt at that time.

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