On October 9, 2019, the U.S. tax authority (the Internal Revenue Service or “IRS”) released Revenue Ruling 2019-24 providing guidance on the U.S. income tax treatment of hard forks and airdrops of cryptocurrency (see our prior post about this guidance).  On December 20, 2019, eight members of the U.S. Congress sent a letter to the Commissioner of the IRS stating that they were “concerned that this recent guidance raises many new questions related to the topics it seeks to address, namely forks and airdrops.”  The letter echoes concerns expressed within the cryptocurrency industry that the hypotheticals used in the guidance do not resemble how hardforks and airdrops actually occur within the cryptocurrency ecosystem and, therefore, do not offer clarification on the reporting and tax obligations of U.S. taxpayers.

The letter also challenges some of the standards adopted by the IRS in the guidance.  Specifically, the Congresspersons write that the IRS appears to adopt a “dominion and control” standard to determine whether a taxable event occurs with respect to airdrops and hardforks.  The letter continues that the IRS “appears to suggest that taxpayers may have dominion and control, and thus be taxed on forked or airdropped assets when the fork or airdrop occurs, even if the taxpayer has no knowledge, and even if the taxpayer takes no affirmative step, or manifests any intention to claim or access those forked or airdropped coins.”  The Congresspersons posit that this standard is inconsistent with established rules applicable to the income tax treatment of unsolicited prizes or samples.  The American Bar Association also set forth potentially applicable legal standards in its comments on hardforks sent to the IRS in March 2018.

The Congresspersons write further that the guidance does not address other significant issues facing taxpayers.  The letter points to the uncertainty surrounding the income tax treatment and effects of the vast variety of cryptocurrency related and based financial products, for example, futures, retirement accounts investing in crypto assets and interest paid on crypto deposits.  Additionally, the letter states the need for guidance on how to complete withholding and tax information reporting forms sent to the IRS such as the Form 1099.

The letter then specifically requests answers to the following questions:

  • Does the IRS intend to clarify its airdrop and fork hypotheticals to better match the actual nature of these events within the cryptocurrency ecosystem? When does the IRS anticipate issuing that clarification?
  • Does the IRS intend to clarify its standard for finding dominion and control over forked assets wherein some level of knowledge and actual affirmative steps taken are necessary to find that the taxpayer has dominion and control?
  • Does the IRS intend to apply the current guidance or any future guidance retroactively, or will the IRS issue proposed guidance that is subject to notice and comment?

The letter concludes by proposing that “until there is clear guidance that is prospective in nature, we urge the IRS to use its authority for penalty relief in those instances in which taxpayers made a good faith effort to comply.”

Notwithstanding this letter, taxpayers who own or have disposed of cryptocurrency need to consider whether they have any reporting or tax obligations.  The IRS Commissioner made several statements over the past year indicating that the IRS expects taxpayers to be aware of their reporting and tax obligations with respect to cryptocurrencies, and the IRS has sent at least 10,000 letters to taxpayers who it believes may have failed to properly report income and pay any tax associated with cryptocurrency.

Author

Christopher Murrer is an associate in the International Tax and Wealth Management practice groups of Baker McKenzie Zurich. He joined the Firm after practicing for seven years as a domestic tax and estate planning attorney in New York and Washington, DC.