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taxpayers in understanding their report- In Situation 1, the taxpayer had sole the law known as the Tax Cuts and Jobs
ing obligations. In Rev. Rul. 2019-24, control over a private key that held one Act (TCJA), P.L. 115-97.
the IRS ruled that a taxpayer owning a unit of bitcoin. Following the hard fork, Preceding the TCJA’s enactment, Sec.
cryptocurrency that undergoes a hard the taxpayer continued to hold one 1031 provided that no gain or loss was
fork has gross income under Sec. 61 if unit of bitcoin but also held one unit of recognized on the exchange of prop-
the hard fork results in a new crypto- bitcoin cash and had the ability to trade erty for property of a like kind, which
currency and the taxpayer actually, or bitcoin cash. The IRS concluded in could have included exchanges of some
constructively, receives the new crypto- Situation 1 that the taxpayer had ordi- personal property and exchanges of real
currency. Many of the additional FAQs nary income in 2017 under Sec. 61 equal property. Generally, in order to qualify
focused on transactions by those who to the fair market value (FMV) of the for like-kind exchange treatment, the
hold virtual currency as a capital asset. bitcoin cash as of the date of the hard property exchanged must be the same
Aside from issues surrounding the fork. As the taxpayer had the ability to nature or character (not the same grade
realization of gross income, taxpayers trade the bitcoin cash at the time of the or quality). As previously discussed, the
may have tax reporting obligations as a hard fork, the taxpayer had dominion IRS established that virtual currency
result of their cryptocurrency holdings. and control. is property for U.S. federal income tax
In order to increase information report- In Situation 2, the taxpayer also purposes and that general tax principles
ing, in tax year 2020, the IRS updated held one unit of bitcoin, however, the applicable to property transactions apply
Form 1040, U.S. Individual Income Tax taxpayer did not hold it directly. The to transactions involving convertible
Return, to include a question specifically taxpayer was a customer of a cryptocur- virtual currency. However, the TCJA
asking all taxpayers if they have received, rency exchange who held the unit in a amended Sec. 1031 to provide that Sec.
sold, sent, exchanged, or otherwise hosted wallet, and the cryptocurrency 1031 treatment is restricted to exchanges
acquired any financial interest in vir- exchange had sole control over the pri- of real property.
tual currencies. vate key. Furthermore, at the time of the The IRS concluded in ILM
The remainder of this discussion fo- hard fork, the cryptocurrency exchange 202124008 that exchanges of: (1) bitcoin
cuses on two recent pieces of IRS guid- decided not to support bitcoin cash, for ether; (2) bitcoin for litecoin; or (3)
ance. In 2021, the IRS issued a Chief which resulted in the taxpayer not being ether for litecoin, prior to 2018, did not
Counsel Advice memo and an IRS able to trade the bitcoin cash. On Jan. qualify as a like-kind exchange under
Legal Memorandum that discussed ad- 1, 2018, the cryptocurrency exchange Sec. 1031. The IRS cited two old rev-
ditional tax consequences for holders of decided to support bitcoin cash, which enue rulings (Rev. Rul. 79-143 and Rev.
bitcoin and certain other specific crypto- enabled the taxpayer to trade bitcoin Rul. 82-166) that each ruled that Sec.
currencies. Each of these is discussed in cash. The IRS concluded in Situation 2 1031 did not apply in their fact patterns
greater detail below. that the taxpayer had ordinary income to support its conclusions. For example,
in 2018 equal to the FMV of the bitcoin Rev. Rul. 82-166 concluded that an
Chief Counsel Advice 202114020 cash as of Jan. 1, 2018. As the taxpayer investor who exchanged gold bullion for
On April 9, 2021, the IRS released did not have dominion and control over silver bullion was required to recognize
Chief Counsel Advice (CCA) the bitcoin cash at the time of the hard gain because gold bullion was not like-
202114020, which discussed the tax fork, the taxpayer did not have income kind property with respect to silver bul-
consequences of the bitcoin hard fork in 2017. lion for purposes of Sec. 1031. In Rev.
that occurred on Aug. 1, 2017, where Based on the IRS’s conclusions in Rul. 79-143, the IRS held that a tax-
holders of bitcoin received bitcoin cash CCA 202114020, taxpayers who held payer who exchanged numismatic-type
on a 1:1 ratio based on the transaction bitcoin at the time of the bitcoin hard coins for bullion-type coins was required
history recorded. fork may want to reassess their tax posi- to recognize gain because numismatic-
The CCA reiterated the tax treat- tions if they have not already done so. type coins were not like-kind property
ment of transactions involving virtual with respect to bullion-type coins for
currency as described in prior guidance IRS Legal Memorandum purposes of Sec. 1031.
(e.g., Rev. Rul. 2019-24 and the FAQs 202124008 In its analysis, the IRS compared
published by the IRS) and clarified the On June 18, 2021, the IRS released IRS litecoin to bitcoin and ether and deter-
IRS’s position for taxpayers who held Legal Memorandum (ILM) 202124008, mined that bitcoin and ether “played a
bitcoin at the time of the hard fork. The which addressed whether Sec. 1031 fundamentally different role from other
IRS summarized the tax ramifications of applied to certain exchanges of bitcoin, cryptocurrencies” during 2016 and 2017.
two distinct situations. ether, and litecoin that occurred prior to The IRS noted that bitcoin and ether

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