TL;DR: US Internal Revenue Service (IRS) lawyer Suzanne R. Sinno, from the Office of Associate Chief Counsel (Income Tax & Accounting), drafted a revenue ruling on the issue of possible taxable events during cryptocurrency hard forks and airdrops in the case of gross income.
IRS Issues Revenue Ruling on Cryptocurrency Hard Forks and Airdrops
Sinno wrote in the five-page document under the rubric of Gross Income (Rev. Rul. 2019-24) how “gross income means all income from whatever source derived, including gains from dealings in property,” and “all gains or undeniable accessions to wealth, clearly realized, over which a taxpayer has complete dominion, are included in gross income [….] In general, income is ordinary unless it is gain from the sale or exchange of a capital asset or a special rule applies.”
She attempted to answer two scenarios. “Does a taxpayer have gross income […] as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency? Does a taxpayer have gross income […] as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency?”
In the first instance, taxpayer “A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A.” Sinno then reasons, “Situation 1: A did not receive units of the new cryptocurrency, Crypto N, from the hard fork; therefore, A does not have an accession to wealth and does not have gross income as a result of the hard fork.”
The second scenario, airdrops, is more complicated. Whereas “B holds 50 units of Crypto R, a cryptocurrency. On Date 2, the distributed ledger for Crypto R experiences a hard fork, resulting in the creation of Crypto S. On that date, 25 units of Crypto S are airdropped to B’s distributed ledger address and B has the ability to dispose of Crypto S immediately following the airdrop,” she explained.
“B now holds 50 units of Crypto R and 25 units of Crypto S,” Sinno continued. “The airdrop of Crypto S is recorded on the distributed ledger on Date 2 at Time 1 and, at that date and time, the fair market value of B’s 25 units of Crypto S is $50. B receives the Crypto S solely
because B owns Crypto R at the time of the hard fork. After the airdrop, transactions involving Crypto S are recorded on the new distributed ledger and transactions involving Crypto R continue to be recorded on the legacy distributed ledger.”
In the IRS’s reckoning, airdrops create for B a new asset, and “therefore, B has an accession to wealth and has ordinary income in the taxable year in which the Crypto S is received. B has dominion and control of Crypto S at the time of the airdrop, when it is recorded on the distributed ledger, because B immediately has the ability to dispose of Crypto S. The amount included in gross income is $50, the fair market value of B’s 25 units of Crypto S when the airdrop is recorded on the distributed ledger. B’s basis in Crypto S is $50, the amount of income recognized.”
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