TAX ALERT: IRS Releases Tax Guidance on Cryptocurrency

Cryptocurrency such as Bitcoin is a new form of currency in the virtual form, and the digital assets community and tax professionals have been awaiting guidance on taxation rules which have been a source of confusion for years.

On October 9, 2019, the IRS released guidance on cryptocurrency for the first time since 2014.  The ruling (Rev. Rul. 2019-24) addresses the taxation of cryptocurrency, including details on tax consequences of cryptocurrency transactions and basic reporting requirements for use.

Here are some of the main items addressed in the new guidance:

  • Accounting and calculation of gain/loss on virtual currency transactions and when taxes are due.
  • A firm definition of cryptocurrency which clarifies a distinction between transactions that are recorded directly on a distributed ledger versus those that are not recorded or occur directly on a distributed ledger as “on” and “off-chain” transactions, respectively.
  • Clarifies income recognition, cost basis determination, holding period and other related questions if a digital asset is received/used as payment for providing/paying for a good or service, donated to a recognized charity, or received as a gift or inheritance.
  • How to treat hard forks (occurs when changes to software create two or more separate versions of cryptocurrency)
  • How to treat airdrops (the distribution of a cryptocurrency token or coin) which result from hard forks

There are still many unanswered questions and further clarity needed, and Sax will continue to keep you posted as updates emerge.  If you have questions regarding the new guidance, and how this guidance impacts you, feel free to reach out to a Sax advisor at (973) 472-6250 or visit www.saxllp.com.