New IRS Guidance: How to Report Crypto Assets Accurately

After sending a recent enforcement letter, the IRS has released two new pieces of guidance for taxpayers who engage in transactions involving digital currency.

The new guidance includes Revenue Ruling 2019-24 and FAQs, including guidance for using the specific identification method.

The IRS has published a new draft for form 1040 Schedule 1, including a broad declaration regarding crypto holdings or trade.

Revenue Ruling 2019-24: airdrops and hard forksSo, what are airdrops and hard forks, and what do they mean for the tax obligations of crypto holders?

The most famous hard fork occurred in August 2017, when some Bitcoin developers and users decided to initiate a hard fork known as Bitcoin Cash.The new IRS guidelines distinguish between hard forks and airdrops, stating that not every hard fork should be treated as an airdrop.

Those who received new currencies in a hard fork are considered as having received them through airdrop and should report it to the IRS as gross income.

The new ruling also acknowledges the possibility that a taxpayer did not receive an airdrop, detailing that if a taxpayer receives new currency from an airdrop into a wallet managed by an exchange that does not support the airdropped currency, the taxpayer is off the hook.

If the exchange later ends up supporting that airdropped crypto, the taxpayer is considered to have received the new currency at that time and is therefore liable to taxation.

While the IRS has made significant steps in regulating crypto, the new guidance raises questions about the request to tax airdrops when the crypto holder receives them as gross income, unlike regular crypto which it's taxable events occur only on selling or exchanging.

Frequently asked questionsBack in 2014, the IRS issued Notice 2014-21, which describes how existing general tax principles apply to transactions using digital currency.