Recent Tax Law Updates: October 2019

IRS Updates on Treatment of Virtual Currency

While continuing to treat virtual currency as a capital asset, in Notice 2014-21, 2014-16 IRB 938, the IRS speaks to its equivalent value in real currency and its treatment. On October 9, 2019, the IRS issued Rev Rul 2019-24, 2019-44 IRB, Among other items, the IRS noted that:

  • The sale of virtual currency must recognize capital gain or loss when received in exchange for performing services is ordinary income. (FAQ 4)
  • The recipient of said currency is to report income equal to the FMV of the virtual currency (in U.S. dollars) when received. When the transaction occurs on the blockchain (an on-chain transaction), the virtual currency is considered received on the date and time of recording on the distributed ledger. (FAQ 11)
  • The basis of the currency is established by when the virtual currency is received. (FAQ 12) The basis of property exchanged for virtual currency is the fair market value of the property at the time of the exchange. (FAQ 17)
  • Similar to other asset transactions, gain or loss is the difference between FMV when received and the adjusted basis of the property exchanged. (FAQ 19)
  • Capital gains and losses are reported on Form 1040, Schedule D and Form 8949, Sales and Other Dispositions of Capital Assets. (FAQ 40)
  • FMV of virtual currency:

o Obtained through a cryptocurrency exchange is the amount that is recorded by the cryptocurrency exchange for that transaction in U.S. dollars. (FAQ 25)

o When obtained through a peer-to-peer transaction (not through a cryptocurrency exchange), FMV is again on the date and time the transaction was recorded on the distributed ledger (on-chain transaction) or, if not recorded (off-chain transaction) when it would have been recorded on the ledger were it an on-chain transaction. (FAQ 26)

o To substantiate the fair market value taxpayers can use a cryptocurrency or blockchain explorer otherwise they must establish that FMV used is an accurate representation of the cryptocurrency's FMV. (FAQ 26)

o When selling/exchanging, using multiple units of virtual currency that were obtained at different times and that have different basis may choose which units of virtual currency were sold, exchanged or otherwise disposed of if they specifically identify which unit or units of virtual currency were involved in the transaction and substantiate the basis in those units. (FAQ 36)

o If the Taxpayer does not specifically identify sold, exchanged or otherwise disposed of virtual currency are deemed to have sold the units on a first-in-first-out (FIFO) basis. (FAQ 38)

USTC Says NO to Second Amended Petition. The Tax Court refuses to allow a taxpayer to amend Tax Court petition a second time because doing so would unfairly prejudice the IRS. (Whitesell, TC Memo 2019-126)

Chaya Kundra, Tax Section Chair

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