Cryptocurrency Hard Forks and Revenue Ruling 2019-24

Abstract

In a recent article appearing in the Virginia Tax Review, I analyzed the income tax issues that arose from hard forks of cryptocurrencies That article focused on the August 1, 2017 hard fork of the Bitcoin blockchain that resulted in the creation of Bitcoin Cash, a new cryptocurrency. The hard fork resulted in a windfall to owners of Bitcoin, who came to own one unit of Bitcoin Cash for each unit of Bitcoin owned at the time. After considering the difficulties of taxing the new units as income immediately, I argued that the Internal Revenue Service (“IRS”) should tax new units of Bitcoin Cash as “open transactions,” deferring income tax consequences until the owner sells or exchanges the units. As that article went to press, the IRS released Revenue Ruling 2019-24 (the “Ruling”), which describes the taxation of cryptocurrency hard forks. The Ruling seems to embrace an “immediate taxation” approach that my article considered but rejected. This essay evaluates the Ruling in light of my recent article. This essay will review some of the arguments against immediate taxation and in favor of open transaction. Perhaps more importantly, this essay will identify inconsistencies and oddities that appear in the Ruling. In particular, the Ruling, by its terms, does not seem to apply to Bitcoin Cash. Even if the IRS wants to apply immediate taxation, it should nevertheless release new guidance that applies more clearly to Bitcoin Cash.

Keywords: cryptocurrencies, bitcoin cash, taxation