The IRS Has Been Talking Cryptocurrency and Taxpayers Need to Listen Up.

The IRS Has Been Talking Cryptocurrency and Taxpayers Need to Listen Up.

There is a misconception that cryptocurrencies are not being regulated in the United States.  In actuality, the Internal Revenue Service (IRS) first issued guidance on virtual currencies way back in 2014.  The IRS is currently working on updating their tax forms to include cryptocurrencies, and just last week they released new tax guidance on cryptocurrencies.  As the end of the 2019 tax season nears, accountants, tax professionals and others directly dealing with cryptocurrencies, need to be aware of the developments in the cryptocurrency tax regulations.

The initial IRS guidance in 2014 never used the term “cryptocurrency” but, it did acknowledge that Bitcoin and other cryptocurrencies fell within their definition of “virtual currencies”.  That guidance made two very important statements regarding the tax classification of virtual currencies, and the tax treatment of the sale and exchange of virtual currencies:

Tax Treatment of Virtual Currency:

For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency

Sale and Exchange of Virtual Currency:

In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.


The simple summary is that the IRS looks at cryptocurrencies like stock.  If you own a cryptocurrency, and it increases in value, then you may have to report capital gains.  If it loses value, then you may be able to report capital losses. Any receipt of cryptocurrency whether it be from mining, or as payment for some type of goods or services, will likely need to be reported as taxable gross income. 

The new guidance given last week explained the IRS’ approach to taxing cryptocurrencies received from hard forks and airdrops.  Before we look at the guidance, let’s first explore what hard forks and airdrops are.

What is a Hard Fork?

In a nutshell, a hard fork is when a single cryptocurrency splits into two.  A hard fork starts with an update or upgrade to the software or protocol on a blockchain platform.  The upgrade to the platform’s code will create a new version of the software. If that new version is incompatible with the older version, then the cryptocurrency being used on the older version would not function on the newer version.  Therefore, a cryptocurrency compatible with the newer version of the software needs to be created. The creation of a new cryptocurrency results in two separate blockchains, with two separate and incompatible versions of software, and two separate tokens.

In comparison, a soft fork occurs when the older and newer versions of the software remain compatible and no new token is needed.

What is a Cryptocurrency Airdrop?

A cryptocurrency airdrop is when coins or tokens are distributed into various cryptocurrency wallets for free.  This method is often used by blockchain platforms during a new coin issuance to bring attention and drive user adoption to their token.  In the cases of a hard fork, an airdrop is performed to distribute tokens of the new software version’s cryptocurrency to wallet addresses of those who held the older version of tokens.  This allows the participants on the older blockchain to now participate on the newer blockchain.

IRS Guidance on Airdrops and Hard Forks

The newly released IRS guidance addresses whether or not a taxpayer has gross income under the Internal Revenue Code as a result of an airdrop of a new cryptocurrency after a hard fork.  

The IRS has advised that if there is no issuance of new cryptocurrency after a hard fork, then the individual does not have gross income.  However, if there was an airdrop or receipt of a new cryptocurrency after a hard fork occurred via airdrop or other form, then the recipient of a new cryptocurrency does have gross income attributable to themselves at the time they receive the units.

 The IRS defines the term “received” as being the time a person has dominion or control of the units to the extent that they can transfer, sell or otherwise dispose of the cryptocurrency.


Join the Keala community

Sign up with your email address to receive news and updates.

We promise not to Spam you!

© Keala Advisors 2024 | All Rights Reserved | Work with an investment advisor who also has a legal and business  background.  Let our experts guide you through the myriad of investment opportunities within public and private equities, digital assets and emerging technologies.

Keala Advisors offers a suite of advisory services dedicated to the investors including: Portfolio Management, Investor Due Diligence and Analysis, Investment Strategy, Financial Planning, Fund Formations, Business Strategy and Education.  Emerging Technology investments that we consult on include but are not limited to: Blockchain, Cryptocurrencies and Digital Assets, Internet of Things (IOT), Machine Learning, Software as A Service (SAAS), Virtual Reality and Artificial Intelligence.

Investment Advisors

Financial Planning

Portfolio Management

Digital Assets Investment Advisors

Emerging Technology Experts

Keala Advisors’ team is comprised of experts in the fields of finance, law and technology.

Keala Advisors advises individual and institutional investors, investment groups, early stage companies, founders, entrepreneurs, professional athletes, creative artists and other individuals with non-traditional income streams and sources of wealth.

The firm’s form ADV parts I and II can be found at