Page 2 - New IRS Cryptocurrency Enforcement Efforts and Opportunities to Become Compliant

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Letter 6173. This letter refers to tax- 2019-24, supplementing previous guidance. n Independent contractors who earn
payers “who may not have met [their] This revenue ruling addresses the tax con- income in the form of cryptocurrency
U.S. tax filing and reporting requirements sequences of “hard forks” and “airdrops.” are subject to self-employment tax on
for transactions involving cryptocurren- A hard fork occurs when a cryptocurrency, that income.
cy.” This letter appears to be targeted to which is generally recorded on a distributed n Wages paid in the form of cryptocur-
taxpayers about whom the IRS has the ledger, experiences a diversion, whereby rency are subject to the same withholding
most serious concerns and mandates a the original (or “legacy”) cryptocurrency rules as wages paid in cash.
response by the date provided in the let- and all transactions in it continue to be n Taxpayers who exchange cryptocurren-
ter. Letter 6173 requires that a taxpayer recorded on the original ledger, while the cy for other assets or property, or for a dif-
either file original or amended returns to new cryptocurrency is created and recorded ferent cryptocurrency, must recognize gain
report cryptocurrency transactions or pro- on a new ledger. At the time of a hard fork, or loss upon such exchange.
vide a statement, signed under penalty of owners of the legacy currency may or may n A taxpayer does not recognize gain or
perjury, explaining why the taxpayer is not receive units of the new currency; this loss when transferring cryptocurrency from
already in compliance with respect to is an airdrop. one wallet or account owned by the taxpayer
cryptocurrency reporting. The letter notes Revenue Ruling 2019-24 states that tax- to another wallet or account also owned by
that taxpayers who do not respond may payers who experience a hard fork without the taxpayer. This is so even if the exchange
be referred for examination. an airdrop (i.e., they do not receive any units that facilitates the transfer issues an infor-
All of the letters direct taxpayers to addi- of the new currency), have not experienced mation return to the taxpayer.
tional resources and information on the tax a taxable event at the time of the hard fork. n Taxpayers who own multiple units of
reporting requirements for cryptocurrency, On the other hand, if a taxpayer receives the same currency with different cost basis
including Notice 2014-21. In addition to an airdrop of a new currency after a hard can choose which ones are deemed sold if
prompting voluntary compliance from tax- fork, the taxpayer has experienced a taxable the taxpayer can specifically identify the
payers who receive the letters, they serve event and is required to report as income units involved in the transaction.
to put such taxpayers on notice of their the value of the newly received currency. n If a taxpayer cannot identify which spe-
cryptocurrency tax obligations. Taxpayers Revenue Ruling 2019-24 provides the cific units are being sold, they are deemed
who receive and ignore these letters will following examples: to be sold on a first-in, first-out basis.
not be able to assert ignorance of their A owns 50 units of cryptocurrency M.
obligations in response to future enforce- Cryptocurrency M experiences a hard fork, A Strong Compliance Push
ment efforts by the IRS, which can resulting in the creation of cryptocurrency The IRS’s enforcement efforts and its
include civil audits, imposition of penal- N. A, however, does not receive any units issuance of substantial guidance with
ties, and even criminal prosecution. of currency N and continues to own only respect to cryptocurrency are clear indica-
50 units of currency M. A does not have tions that it takes the issue seriously and
Additional Guidance taxable income as a result of the hard fork. will more aggressively pursue taxpayers
The IRS has also recently issued addi- B owns 50 units of cryptocurrency R. who continue to be noncompliant regarding
tional guidance on the subject of cryptocur- Cryptocurrency R experiences a hard cryptocurrency income. As the taxability
rency. The guidance answers numerous fork, resulting in the creation of cryp- of cryptocurrency receives increasing pub-
questions that were left open after the tocurrency S. On that date, 25 units of licity, and as the IRS continues to answer
issuance of Notice 2014-21 and also currency S are airdropped to B, who has cryptocurrency questions, taxpayers who
addresses some new cryptocurrency devel- access to the new currency. After the hard continue to get it wrong will be hard-
opments that have raised new tax questions. fork and airdrop, B now has 50 units of pressed to argue that such errors were inno-
The purpose of this additional guidance is currency R and 25 units of currency S. cent mistakes and will be subject to an
obviously to answer the specific questions Because B has received a new asset in increased likelihood of facing civil penalties
addressed; however, it also serves the larger the form of currency S, B must recognize and criminal consequences. Taxpayers who
goal of increasing voluntary compliance. taxable income equal to the fair market are not properly reporting cryptocurrency
More guidance inevitably translates into value of currency S. income should quickly seek professional
increased compliance because it allows tax- Also on October 9, 2019, the IRS guidance on their tax obligations and their
payers who wish to be compliant, but do issued 43 Frequently Asked Questions options for coming into compliance. q
not know the rules, to report and pay tax (FAQ) addressing additional areas of
on their transactions in a correct manner. uncertainty with respect to cryptocurren- Michael Sardar, JD, is a tax controversy
In furtherance of that goal, on October cy. Examples of the FAQ guidance attorney at Kostelanetz & Fink LLP, New
9, 2019, the IRS issued Revenue Ruling include the following: York, N.Y.

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