In this Tax Notes article published today, February 24, 2020 attorneys Arvind Ravichandran and Maurio Fiore, associates at the law firm Cravath, Swaine & Moore LLP, explain in fascinating detail the ABC’s of cryptocurrency, the workings of the mysterious blockchain technology and carefully dissect the IRS’ recent guidance enunciated in Revenue Ruling 2019-24.
The article details why the IRS’ recent guidance on chain splits resulting from forks as contained in the Ruling and its related FAQs is troublesome. The authors explain why the Ruling is, “at best, relevant only to its extremely specific (and unusual) facts.” One of the major problems with the Ruling is that its analysis is barely adequate given the complexity of the underlying tax doctrines and cryptocurrency technology.
Interestingly, they believe that the inspiration for Revenue Ruling 2019-24 might have stemmed from the decision by the popular exchange, Coinbase, in the Bitcoin/Bitcoin Cash chain split. There, Coinbase refused to recognize Bitcoin Cash until well after the chain split occurred through an airdrop. The real workings in the world of cryptocurrency as demonstrated in the example of the Bitcoin/Bitcoin Cash chain split highlight the difficulty in applying US tax principles to crypto transactions.
The authors laudably provide a more thorough analysis of chain splits, issues concerning dominion and control with airdrops, ordinary income versus capital gain treatment of airdropped cryptocurrency and much more. They provide an alternative approach to the tax treatment of chain splits bearing in mind the various complex problems associated with cryptocurrencies. The authors recommend that the IRS clarify certain issues spelled out in their excellent work.
The article is a must read for those seeking to understand the US tax issues associated with crypto and significant cryptocurrency transactions. Tax Notes provides a free trial subscription through which you can access the article.
Want more tax information on crypto? Check all of my blog posts on the subject, here.
Posted February 24, 2020
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