Guidance and enforcement put virtual currencies front and center

By Jeff Borghino, CPA; Shamik Trivedi, J.D.; and Omair Taher, J.D., Washington, D.C.

Editor: Greg A. Fairbanks, J.D., LL.M.

Recent guidance by the IRS regarding the tax treatment of transactions involving virtual currencies, coupled with the Service's enforcement efforts, highlights the need for taxpayers to ensure that they report any virtual currency transactions appropriately.

The IRS concurrently issued a revenue ruling (Rev. Rul. 2019-24) and frequently asked questions (the 2019 FAQs, which are available at on Oct. 9, 2019 (with the FAQs amended in December 2019), to expand on existing guidance related to the tax treatment of virtual currency transactions. This guidance came after other developments, including the IRS's announcement of a virtual currency compliance campaign through the Large Business & International (LB&I) division and a regulatory project for reporting the gross proceeds from cryptocurrency transactions, the latter contained in the IRS and Treasury Department's Priority Guidance Plan for 2019-2020.

This item provides a brief background and history of virtual currency transactions and a summary of the current developments.


The use of virtual currencies has exploded over the last decade. One form of virtual currency is cryptocurrency, which are digital tokens recorded on a decentralized ledger such as a blockchain. Bitcoin is largely credited as being the first open-source, decentralized cryptocurrency. There are many other kinds of virtual currency.

The IRS issued Notice 2014-21 in the form of 16 FAQs on March 25, 2014, to provide taxpayers with guidance on the tax treatment of virtual currency transactions. The key takeaway from that notice was that the IRS considers virtual currency to be property for federal income tax purposes. Notwithstanding the fundamental tax principles that apply to property transactions, commentators requested additional guidance from the IRS to address numerous issues (e.g., AICPA, "Updated Comments on Notice 2014-21: Virtual Currency Guidance" (May 30, 2018), available at

A few issues raised for additional guidance were the tax treatment of an "air drop," a "soft fork," and a "hard fork." Put simply, an airdrop is a distribution of virtual currency to existing wallet addresses. A soft fork is a change to the blockchain protocol that creates blocks that are still compatible under the legacy rules. A hard fork is a change to the blockchain protocol that creates blocks that are not compatible under the legacy rules. A prominent example of this occurred on Aug. 1, 2017, when a bitcoin hard fork resulted in two versions of bitcoin: bitcoin and bitcoin cash. As a result of the hard fork, all bitcoin holders received the same amount of bitcoin cash on the new blockchain.

Rev. Rul. 2019-24

The IRS ruled in Rev. Rul. 2019-24 on the tax treatment of two scenarios involving a hard fork of a cryptocurrency.

In Situation 1 of the revenue ruling, a taxpayer held 50 units of a cryptocurrency, crypto M, which experienced a hard fork that resulted in the creation of a new cryptocurrency, crypto N. However, crypto N units were not airdropped or otherwise transferred to an account the taxpayer owned or controlled. The IRS ruled in Situation 1 that the taxpayer did not have gross income under Sec. 61 as a result of the hard fork because the taxpayer did not receive any units of a new cryptocurrency.

Situation 2 of the revenue ruling had a distinct fact pattern from Situation 1. Situation 2 provided that a taxpayer held 50 units of a cryptocurrency, crypto R, that experienced a hard fork that resulted in the creation of a new cryptocurrency, crypto S. However, the hard fork resulted in 25 units of crypto S being airdropped and distributed to the taxpayer. Immediately following the airdrop, the taxpayer held 50 units of crypto R and 25 units of crypto S. The taxpayer had the ability to dispose of the crypto S units immediately following the airdrop, and the fair market value (FMV) of the crypto S units was $50. Furthermore, Situation 2 emphasized that the taxpayer received the crypto S units solely because the taxpayer owned the crypto R units at the time of the hard fork.

The IRS ruled in Situation 2 that the taxpayer had an accession to wealth and had gross income under Sec. 61 in the tax year crypto S was received, citing Glenshaw Glass, 348 U.S. 426, 431 (1955). The IRS concluded that the taxpayer had dominion and control of crypto S when it was recorded on the distributed ledger because the taxpayer immediately had the ability to dispose of crypto S. The amount of gross income was the FMV of crypto S, $50, and the taxpayer's basis in crypto S was $50.

2019 FAQs

The 2019 FAQs reiterate the principles of Notice 2014-21 but also supplement it with expanded guidance on issues that may arise in virtual currency transactions. In prefacing the 2019 FAQs, the IRS stated that the guidance merely applies general, long-standing tax principles to virtual currency, and the 2019 FAQs expand upon the examples provided in Notice 2014-21.

The 2019 FAQs establish definitions for virtual currency and cryptocurrency that were not previously provided in Notice 2014-21. A virtual currency is defined as a digital representation of value, other than a representation in the form of the U.S. dollar or a foreign currency, that functions as a unit of account, a store of value, and a medium of exchange. If a particular asset has characteristics of virtual currency, it will be treated as virtual currency for federal income tax purposes regardless of the label (FAQ No. 1). A cryptocurrency is defined as a type of virtual currency "that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain" (FAQ No. 3). Some of the 2019 FAQs relate to all virtual currency, and some of them relate to cryptocurrency, as described below.

Sale or exchange of virtual currency

The 2019 FAQs reiterate that virtual currency is treated as property, and general tax principles for property transactions apply. Thus, taxpayers recognize gain or loss when they sell or exchange virtual currency for other property or services (FAQ No. 2). Whether a gain or loss from the sale or exchange of virtual currency is a short-term or long-term capital gain or loss will depend on the holding period that the taxpayer held the virtual currency (FAQ No. 5). In determining gain or loss from the sale or exchange in virtual currency, taxpayers take into account cost basis, consisting of the amount spent to acquire the virtual currency, including fees, commissions, and other acquisition costs (FAQ No. 7).

A taxpayer that owns multiple units of the same virtual currency that were acquired at different times may specifically identify which units are deemed to be sold, exchanged, or disposed of when the taxpayer sells, exchanges, or disposes of some units but not all (FAQ No. 38).

The specific identification may be accomplished either: (1) by documenting the specific unit's unique digital identifier such as a private key, public key, and address; or (2) by records showing the transaction information for all units of a specific virtual currency held in a single account, wallet, or address. The specific identification must show: (1) the date and time each unit was acquired; (2) the taxpayer's basis and the FMV of each unit at the time it was acquired; (3) the date and time each unit was sold, exchanged, or disposed; and (4) the FMV of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit (FAQ No. 39). If the taxpayer does not identify a specific unit of virtual currency, the taxpayer is deemed to have sold, exchanged, or disposed of units of virtual currency in chronological order, beginning with the earliest unit of the virtual currency purchased or acquired (i.e., first-in, first-out, or FIFO) (FAQ No. 40).

The 2019 FAQs clarify that if a taxpayer transfers virtual currency from a wallet, address, or account belonging to the taxpayer to another wallet, address, or account that also belongs to the same taxpayer, the transfer is a nontaxable event (FAQ No. 37).

Virtual currency for services

The 2019 FAQs also restate that a taxpayer who receives virtual currency as payment for performing services recognizes gross income, and the taxpayer has gross income regardless of whether the taxpayer performs the services as an employee (FAQ No. 8).

The amount of ordinary income that a taxpayer recognizes is equal to the FMV of any virtual currency received for performing services. If the taxpayer is an independent contractor, the FMV of the virtual currency received for services performed constitutes self-employment income and is subject to the self-employment tax (FAQ No. 9). If the taxpayer is an employee, the FMV of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act tax, and Federal Unemployment Tax Act tax and must be reported on Form W-2Wage and Tax Statement. Virtual currency paid by an employer as remuneration for services constitutes wages for employment tax purposes (FAQ No. 10).

Gifts and contributions

The 2019 FAQs clarify that a taxpayer who receives virtual currency as a bona fide gift will not recognize income until the taxpayer sells, exchanges, or otherwise disposes of that virtual currency (FAQ No. 30). If a taxpayer donates virtual currency to a charitable organization described in Sec. 170(c), the taxpayer will not recognize income, gain, or loss from the donation (FAQ No. 33). The amount of a charitable deduction for the donation of virtual currency is (1) the FMV of the virtual currency at the time of the donation if it was held by the taxpayer for more than one year; or (2) the lesser of the taxpayer's basis or its FMV if it was held for one year or less (FAQ No. 34).


The 2019 FAQs provide additional guidance on the IRS's view of airdrops, soft forks, and hard forks. For the definitions of a hard fork and a soft fork, they establish that (1) a hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger (FAQ No. 21); and (2) a soft fork occurs when a distributed ledger undergoes a protocol change that does not result in a diversion of the ledger and, thus, does not result in the creation of a new cryptocurrency (FAQ No. 29).

The 2019 FAQs provide that if a taxpayer did not receive any new cryptocurrency as a result of a hard fork, the taxpayer does not have taxable income; however, if a hard fork followed by an airdrop results in a taxpayer's receiving new cryptocurrency, the taxpayer has taxable income in the tax year that the taxpayer received the new cryptocurrency, consistent with Rev. Rul. 2019-24. Because a soft fork, under the IRS's definition, does not result in a taxpayer's receiving new cryptocurrency, the 2019 FAQs state that a soft fork will not result in any income to a taxpayer.

The 2019 FAQs also provide taxpayers guidance related to how to determine a cryptocurrency's FMV at the time of receipt. If a taxpayer receives a cryptocurrency in a transaction facilitated by an exchange, the FMV is the amount that the exchange recorded. If the transaction was not recorded on a distributed ledger, the FMV is the amount the cryptocurrency was trading for on the exchange on the date and time of the transaction had it been recorded on the ledger (FAQ No. 25). For peer-to-peer transactions, the IRS will accept as evidence the value determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value at an exact time and date (FAQ No. 26). If the taxpayer does not use an explorer value, the taxpayer must establish that the value it uses is an accurate representation of the cryptocurrency's FMV. When a taxpayer receives cryptocurrency that is not traded on any cryptocurrency exchange and does not have a published value, the FMV of the cryptocurrency received is equal to the FMV of the property or services exchanged for the cryptocurrency when the transaction occurs (FAQ No. 27).

Reporting and recordkeeping

The 2019 FAQs state that taxpayers must report income, gain, or loss from virtual currency transactions on their federal income tax return for the tax year of the transaction regardless of the amount and whether a taxpayer even receives a payee statement or information return (FAQ No. 39). The 2019 FAQs advise taxpayers to maintain records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the FMV of the virtual currency (FAQ No. 45).

Compliance and enforcement

As noted above, the IRS is taking a dual-front approach to ensuring compliance for cryptocurrency transactions. Rev. Rul. 2019-24 not only provides guidance to taxpayers, but it also serves to inform the public of the IRS's litigating position. Rev. Rul. 2019-24 does not have an effective date, so taxpayers holding cryptocurrency should carefully consider whether they have complied with their tax obligations.

It may be important for taxpayers to consider filing a "qualified amended return" to correct a previously filed return without the risk of accuracy-related penalties, so long as the original return was not filed with a fraudulent position (see Regs. Sec. 1.6664-2(c)(3)). For example, if in a prior year a taxpayer experienced a hard fork similar to Situation 2 of Rev. Rul. 2019-24 and the taxpayer failed to report any corresponding gross income, then that taxpayer could file a qualified amended return to report the appropriate amount of gross income, without being penalized by the IRS, assuming the original return did not take a fraudulent position.

The determination of whether to amend a tax return is made by each taxpayer. That determination may be based on the advice from a return preparer or other tax professional. There is no requirement to amend a tax return under the Code, but taxpayers risk penalties for failing to remedy a failure to report gross income. In the context of underreporting or failing to report proceeds from cryptocurrency transactions, taxpayers should be wary of believing they will "get away with it," because the IRS has dramatically increased its attention to enforcement in several ways.

Some of this enforcement has come from the government's data-gathering efforts through the judicial process. In 2017, the Department of Justice (DOJ) was able to enforce a John Doe summons against Coinbase Inc., a virtual currency exchange, in which the IRS sought significant information of certain Coinbase customers, including user profiles, know-your-customer due diligence, documents regarding third-party access, transaction logs, records of payments processed, correspondence between Coinbase and certain of its users, account or invoice statements, records of payments, and exception records produced by Coinbase's anti-money-laundering system. By all accounts, the IRS has been using this data (which affects 13,000 Coinbase customers) in its tax compliance and enforcement efforts.

Just a few months later, in July 2018, the IRS announced a virtual currency compliance campaign through the LB&I division (details are available at, whereby compliance would be encouraged through examinations as well as outreach. One year later, in July 2019, the IRS announced that it planned to send "soft letters" to nearly 10,000 taxpayers, educating them on tax compliance for virtual currencies (details are available at (see Curry, "Rettig on Virtual Currency Letters: Take a Hint," 164 Tax Notes Federal 929 (Aug. 5, 2019)).

The enforcement of the summons against Coinbase, followed by the LB&I campaign and the subsequent issuance of soft letters, follows a somewhat familiar process of IRS enforcement. The government has gathered data and is offering taxpayers it believes to be out of compliance the opportunity to come into compliance. That approach may not last too long before the IRS begins more aggressive enforcement, which could come with civil and criminal penalties (see Sapirie, "A New Era for Crypto Enforcement," 165 Tax Notes Federal 1095 (Nov. 18, 2019)).

More recently, the IRS discussed efforts it is undertaking to require information reporting under Sec. 6045, and presumably through Form 1099, for reporting of gross proceeds from cryptocurrency transactions. A regulatory project for that reporting is listed on the IRS and Treasury Department's Priority Guidance Plan for 2019-2020.

From an individual compliance standpoint, Form 1040, U.S. Individual Income Tax Return, contains a yes-or-no question on Schedule 1, Additional Income and Adjustments to Income, asking whether the taxpayer received, sold, sent, exchanged, or otherwise acquired any financial interest in a virtual currency. This question would require taxpayers who hold virtual currencies to answer affirmatively on a tax return, and it gives rise to the potential for criminal exposure should a taxpayer answer the question incorrectly. The IRS and the DOJ have pursued both civil and criminal actions against taxpayers that did not correctly answer a similar question on Schedule B, Interest and Ordinary Dividends, regarding a taxpayer's financial interest in, or signature authority over, a foreign financial account. Taxpayers should take note of the government's methods in exacting compliance in the context of foreign financial accounts and that similar methods may also be used in virtual currency compliance.

Stepped-up IRS enforcement is a given

While the IRS guidance discussed above is welcome, the current guidance appears to be primarily a clarification of existing tax law. While some have raised comments that Situation 2 of Rev. Rul. 2019-24 is not practical (see Richman, "Taxpayers Never Have Control of New Coins After Hard Forks," 165 Tax Notes Federal 1668 (Dec. 9, 2019)), taxpayers should be well advised that the government's position is that much, if not all, of the guidance on virtual currency transactions is based on long-standing tax principles. Thus, virtual currency transactions in past years would be subject to those principles even though there was little prior guidance.

In addition, the fact that there is no de minimis exception for tracking personal virtual currency transactions, such as buying coffee using the currencies, may hinder either the utility of virtual currency or the compliance by taxpayers due to administrative burdens, or both. Similarly, while the 2019 FAQs provide for specific identification as described above, such a method may be administratively burdensome to implement for many taxpayers for smaller transactions.

Given the recent guidance and the increased attention from the IRS on virtual currency transactions, it would be prudent for taxpayers to diligently track their virtual currency transactions and assess the tax consequences before entering into future transactions.


Greg Fairbanks, J.D., LL.M., is a tax managing director with Grant Thornton LLP in Washington.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or

Contributors are members of or associated with Grant Thornton LLP.

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