Cryptocurrencies continue to receive high-level attention from the IRS.

The IRS shed more light on their tax treatment in November.

Cryptocurrencies are treated as property for US tax purposes. Therefore, anyone using a cryptocurrency to buy goods or services is treated as if the cryptocurrency had been exchanged for cash, thereby triggering a gain or loss equal to the difference between the amount originally paid for the cryptocurrency and the fair market value of the goods or services received in return. This makes it hard for cryptocurrencies to serve as a real currency. (For more detail, see “Bitcoins” in the April 2014 NewsWire and “Cryptocurrencies and Taxes” in the April 2018 NewsWire.)

The IRS addressed the tax consequences of “hard forks” and “air drops” in a revenue ruling in November.

Cryptocurrencies are basically entries on digital ledgers. A “hard fork” is when one cryptocurrency is split into two. The IRS said a hard fork without more does not trigger an income tax. The cryptocurrency owner is no wealthier than he or she was before the split.

An “air drop” is where new coins are widely distributed. For example, a company might give cryptocurrency holders free coins as a way to market a new offering and build awareness among potential customers. Recipients may not have asked for the coins.

Coins distributed in an airdrop must be reported as taxable income, the IRS said. The holder then takes a tax basis in the new coins equal to the income reported. There would be more income, or a loss, to report later when the coin is used if there has been a change in value.

However, anyone receiving new coins is not taxed on them until he or she has “dominion and control,” meaning the ability to dispose of the coins.

The ruling on this subject is Revenue Ruling 2019-24.

The IRS is coordinating how it handles cryptocurrency issues. A notice distributed internally in late October said that all “novel issues or issues likely to attract national attention” should be brought back to the IRS national office in Washington.

Christopher Wrobel, an IRS special counsel, told a meeting of the American Institute of Certified Public Accountants in Washington in November that exchanges of one cryptocurrency for another may have qualified as tax-free like-kind exchanges before the 2017 tax reforms limited like-kind exchanges to exchanges of real property. He said it depends on the facts.

For now, IRS efforts appear focused mainly on education and compliance.

Michael Desmond, the IRS chief counsel, said in October that an estimated 8% of Americans hold some form of cryptocurrency.

The Form 1040 that individual taxpayers will have to file next year for 2019 will ask them to check a box on the tax form if they received, used or sold any cryptocurrencies during 2019. This is similar to the box used now to identify taxpayers with foreign bank accounts.

The IRS sent letters to more than 10,000 cryptocurrency holders over the summer whom it suspects may not have reported income.