The current state of evolution of cryptoasset taxation

By Cynthia Pedersen, J.D., LL.M., Hunt Valley, Md.

Editor: Anthony S. Bakale, CPA

The IRS began sparingly providing tax guidance on cryptoasset reporting standards beginning in 2014 with Notice 2014-21. The notice applied the general tax principles for property to transactions involving cryptoassets or, as the IRS calls them, "virtual currency." As the asset class evolved, questions began to emerge on the income tax implications of more complex transactions. In 2019, five years after the notice was issued, the IRS released Rev. Rul. 2019-24 and a series of FAQs on its website (available at intended to clarify U.S. tax reporting obligations with regard to specific transactions. The revenue ruling addressed the IRS's perspective on the taxation of hard forks and airdrops, whereas the FAQs expanded on information provided within the notice for those who hold cryptoassets as capital assets. While the guidance was welcome, it fell short of illuminating the tax treatment of many common transactions.

In April 2021, due to the shortcomings of the revenue ruling, taxpayers were pleased when the IRS released Chief Counsel Advice (CCA) 202114020, addressing the tax treatment of the August 2017 bitcoin hard fork (bitcoin (BTC)/bitcoin cash (BCH)). Although the CCA is targeted at the BTC/BCH hard fork, it provides insight into how the IRS may evaluate more complex cryptoasset transactions.

4 things to know amid a hodgepodge of guidance

Cryptoassets are treated as property and not currency: For federal tax purposes, cryptoassets are treated as property, and general tax principles of property transactions apply. Essentially, the sale or exchange of cryptoassets (including transfers from one cryptoasset to another) results in gain or loss based on the difference between the fair market value (FMV) of the cash or property received in exchange for the cryptoasset and taxpayers' adjusted basis in their cryptoasset. The character of the gain or loss generally depends on whether the cryptoasset is a capital asset in the hands of the taxpayer.

Information reporting is required when making a payment in cryptoassets for services: The fact that a payment for services is made in cryptoassets does not negate requirements to report such payments. Consequently, the FMV of cryptoassets 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-2, Wage and Tax Statement. Additionally, reporting (without withholding for payments made to U.S. persons) is required on Form 1099-NEC, Nonemployee Compensation, for service income paid to an independent contractor.

It may be difficult to determine the cryptoasset's FMV where a service provider is providing services to a startup business in exchange for tokens that are not traded on any cryptoasset exchange and generally do not yet have a published value. Pursuant to IRS FAQ No. 28, the amount to report as wages should equal the FMV of the services exchanged for the cryptoasset when the transaction occurs, which generally will be substantially higher than the actual value of the distributed tokens.

Hard forks result in income at the time the fork occurs if the taxpayer has dominion and control over the new cryptoasset: A hard fork occurs when a cryptoasset undergoes a protocol change, resulting in a permanent diversion from the legacy distributed ledger (i.e., blockchain), resulting in two separate and distinct distributed ledgers. The new distributed ledger will generally feature a new cryptoasset.

Prior to the release of the revenue ruling and the CCA, taxpayers were taking different positions on the income tax treatment of a hard fork. For example, some taxpayers treated the receipt of the new cryptoasset as a taxable event, with the FMV of the new cryptoasset being zero, while some taxpayers split the basis of the legacy cryptoasset between the legacy cryptoasset and the new cryptoasset. Still other taxpayers argued that the receipt of the new cryptoasset is not a taxable event until the new cryptoasset is disposed of in a taxable transaction, and continue to lobby the IRS to adopt this treatment.

The IRS guidance balked at all these treatments and instead determined that when taxpayers receive a new cryptoasset following a hard fork, they recognize ordinary income equal to the FMV of the new cryptoasset when received. The CCA covering the BTC/BCH hard fork outlined a real-world example. It clarifies that a taxpayer who received BCH as a result of the hard fork had gross income under Sec. 61 if that taxpayer had dominion and control over the BCH. Dominion and control is demonstrated by a taxpayer's ability to transfer, sell, exchange, or otherwise dispose of the new cryptoasset. Therefore, taxpayers who held their BTC on a third-party exchange that did not support BCH did not have income until the exchange made BCH available. Taxpayers who directly maintained control over their private key typically have dominion and control immediately when the new distributed ledger is launched.

Taxpayers may value the new cryptoasset using any reasonable method: The CCA and FAQ No. 27 address how to determine the FMV of cryptoassets received in a peer-to-peer transaction without an exchange-listed value. FAQ No. 27 authorizes using a cryptoasset or blockchain explorer that analyzes worldwide indices of a cryptoasset to calculate a cryptoasset's value at an exact date and time. The CCA expands on this by allowing the use of any reasonable method, such as adopting the publicly published price at a third-party exchange or a cryptoasset data aggregator such as CoinMarketCap.

Are these positions final?

Cryptoasset guidance is fluid and subject to change based on future statutory and regulatory guidance. Only guidance published in the Internal Revenue Bulletin is binding on the IRS and can be relied upon by taxpayers as authoritative. Therefore, the notice and revenue ruling may be relied upon as authoritative guidance, but both the FAQs and the CCA are subject to change and not considered as authoritative guidance. Nonetheless, the FAQs and CCA should still be carefully considered, as they outline the IRS's technical understanding of cryptoasset taxation.

The need for clear guidance has not escaped U.S. lawmakers, who are beginning to introduce legislation in an effort to provide stability to the market. Although, as of the drafting of this item, no such legislation has been subjected to a full vote in either the House or Senate, bills such as the Token Taxonomy Act of 2021, H.R. 1628, are laying the groundwork for viable legislation that may alter the current understanding.

4 things practitioners want to know more about

Some major tax items that need clarification include:

Tax classification: As outlined above, cryptoassets are currently considered property for tax purposes. However, it is unclear if the IRS intends to segregate cryptoassets into subsets of property based on their use. Certain cryptoassets may have attributes of securities, others attributes of commodities, and others some different type of financial instrument. The absence of specific groupings leaves the proper application of investment rules such as securities lending, wash sales, and investment entity treatment unclear.

Additionally, on June 9, 2021, El Salvador adopted bitcoin as legal tender in the country. Bitcoin will not replace the U.S. dollar as El Salvador's official currency; however, a foreign country adopting bitcoin as legal tender could affect the IRS's current views around the tax classification of cryptoassets. If additional countries adopt bitcoin or other cryptoassets as legal tender, this may push the IRS to alter its position that cryptoassets are not "real" currencies that generate foreign currency gain or loss under Sec. 988.

Staking: Although there is no direct guidance regarding the income taxation of staking activities, the guidance from the IRS on the receipt of new cryptoassets seems to imply that the receipt of staking rewards may result in taxable income.

Sourcing: Sourcing the receipt of cryptoassets from different activities will help taxpayers determine their withholding and reporting obligations when entering into transactions with non-U.S. persons.

Information reporting: The IRS currently does not have a position on how third-party exchanges should report transfers or dispositions of cryptoassets to their customers.

The IRS continues to focus on enforcement

The IRS is taking steps to root out unreported cryptoasset transactions, as is evident from the newly prominent question on page 1 of the 2020 Form 1040, U.S. Individual Income Tax Return: "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" Additionally, the IRS continues to issue John Doe summonses to third-party exchanges, seeking information on U.S. taxpayers who conducted at least $20,000 in transactions during tax years 2016-2020. John Doe summonses are known to be approved against a few commonly used exchanges. The IRS is working on its infrastructure to discover potential tax fraud and to ensure that both civil and criminal enforcement mechanisms are available. It is vital for taxpayers to maintain adequate records substantiating sales, exchanges, or other dispositions of their cryptoassets.

Laying the groundwork for the future

As cryptoasset acceptance expands, the need for comprehensive tax guidance becomes increasingly critical for U.S. taxpayers. Some questions have been answered, but many still remain. Taxpayers should focus on reporting with consistency and good faith while awaiting definitive guidance.


Anthony Bakale, CPA, is with Cohen & Company Ltd. in Cleveland.

For additional information about these items, contact Mr. Bakale at

Unless otherwise noted, contributors are members of or associated with Cohen & Company Ltd.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.