Cryptocurrency Tax Update: IRS Offers New Cryptic Guidance
By Ken Harvey & Kali McGuire1
On October 9, 2019, the Internal Revenue Service ("IRS") released long-anticipated cryptocurrency transaction characterization and reporting guidance in the form of Revenue Ruling 2019-24 ("the Revenue Ruling") and a 43-item "Q&A" style guide ("the Q&A")2 The guidance arrives concurrently with many crypto investors receiving letters from the IRS requesting information related to their crypto transactions. The IRS guidance may prove useful for taxpayers who seek confirmation about the validity of prior reporting positions and guidance about documenting anticipated crypto transactions. Many unanswered questions nevertheless still remain.
Taxpayers had previously relied on five-year-old Notice 2014-21 ("the Notice")3 for basic characterization guidance for cryptocurrency transactions. The Notice asserted the IRS’s position that cryptocurrency was considered to be "property" in the hands of the taxpayer and would receive treatment as a capital asset for U.S. tax purposes. Accordingly, as a capital asset, crypto would not be treated as a form of fiat currency or money. The Notice, while fairly basic, was the only authority or guidance available to taxpayers and tax advisors for five years until the release of the Revenue Ruling and the Q&A. The Revenue Ruling builds on the basic concepts provided in the Notice by providing guidance on "hard forks," "air drops," and additional technical matters, such as valuation and tax basis.