On October 9, 2019, the Internal Revenue Service (“the Service”) published further guidance regarding the tax treatment of cryptocurrency. This marks the first time since 2014 that the Service has provided insight into the taxation of this fast-evolving area. In Rev. Rul. 2019-24, the Service specifically discussed whether and how “hard forks” or “airdrops” could affect the taxable income of those owning and exchanging cryptocurrencies.

As explained in the revenue ruling, “a hard fork is unique to distributed ledger technology [e.g, blockchain] and occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from a legacy or existing distributed ledger.” In other words, a hard fork may result in the “creation” of new cryptocurrency that will be recorded on a new ledger, but past transactions involving the cryptocurrency may also be recorded on a prior ledger.

The Service also explained the meaning of an airdrop as “a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers.” While an airdrop is generally received when recorded on the ledger, it may be constructively received prior to (or potentially after) that date. Importantly, the Service indicated that constructive receipt stemming from an airdrop will not occur until the taxpayer is able to exercise dominion and control over that property – following prior interpretations of I.R.C. § 61. In particular, if the taxpayer maintains cryptocurrency through an exchange and that exchange does not recognize the new cryptocurrency resulting from the airdrop (i.e., so the taxpayer does not have access to that property or the ability to transfer it), the Service takes that position that dominion and control are not present at that time and no income is recognized until the taxpayer acquires such abilities.

In an effort to provide further clarity, the revenue ruling also provides two examples involving hard forks and airdrops and provides the application of the Service’s position with respect to those hypothetical scenarios.