Airdrops & Forks: Recent Cryptocurrency Revenue Ruling Gives Guidance for U.S. Taxpayers

Photo via Good Free Photos

TL;DR – Airdrops & Forks are taxable events when recipient has dominion & control over the cryptocurrency (always consult a competent tax advisor)

Any time media reports stories of huge ascensions of wealth due to Bitcoin or other cryptocurrency, interest in acquiring cryptocurrencies increases. As more people seek (hopefully) outsized returns from cryptocurrency investments, U.S. investors need to be aware of the tax consequences.

Most investors in cryptocurrencies would be holding their crypto as a capital asset since the Internal Revenue Service (“IRS”) has stated in its 2014 Notice that virtual currencies are property. The IRS distinguishes cryptocurrencies from virtual currencies in that cryptocurrencies are “a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.”

IRS Revenue Ruling 2019-24 Guidance

Rev. Rul. 2019-24 reminds taxpayers that “all gains or undeniable accessions to wealth, clearly realized, over which a taxpayer has complete dominion, are included in gross income”. In the Revenue Ruling, the IRS presents two hypothetical situations:

Situation 1: Taxpayer A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by Taxpayer A.

Situation 2: Taxpayer B hold 50 units of Crypto R, a cryptocurrency. On Date 2, the distributed ledger for Crypto R experiences a hard fork, resulting in the creation of Crypto S. On that date, 25 units of Crypto S are airdropped to B’s distributed ledger address and B has the ability to dispose of Crypto S immediately following the airdrop. B now holds 50 units of Crypto R and 25 units of Crypto S. The airdrop of Crypto S is recorded on a distributed ledger on Date 2 at Time 1 and, at that date and time, the fair market value of B’s 25 units of Crypto S is $50. B receives the Crypto S solely because B owns Crypto R at the time of the hard fork. After the airdrop, transactions involving Crypto S are recorded on the new distributed ledger and transaction involving Crypto R continue to be recorded on the legacy distributed ledger.

IRS holds taxpayer control over the crypto triggers taxable income

Regarding Situation 1, the IRS’s position is that Taxpayer A has not experienced a taxable event because Taxpayer A “did not receive the units of the new cryptocurrency” from the hard fork. Regarding Situation 2, the IRS’s position is that Taxpayer has received “an accession to wealth and has ordinary income in the taxable year in which the Crypto S is received…[t]he amount included in gross income is $50, the fair market value of B’s 25 units of Crypto S when the airdrop is recorded on the distributed ledger” and “B’s basis in Crypto S is $50, the amount of income recognized.”

Based on these conclusions in the Revenue Ruling, the IRS weighs the taxpayer’s ability to control the “account” (cryptocurrency address) as a determining factor of whether the taxpayer has received “an accession of wealth” (income).

Income measured by Fair Market Value at the time of airdrop

The amount of income is measured by the FMV at the time of the airdrop or receipt of additional cryptocurrency. FMV of forked cryptocurrencies are extremely volatile because cryptocurrency markets have no idea if investors will prefer this new forked coin and often forked coins decline in value after the fork due to lack of liquidity and the some investors’ willingness to dispose of the “free” cryptocurrency.

What’s an Airdrop?

A. Distribution of a cryptocurrency initiated by someone other than the recipient.

Cryptocurrency communities typically use airdrops to increase awareness of a particular cryptocurrency or project because an airdrop feels like “free money”. According to Wikipedia, an “airdrop” is “a distribution of a cryptocurrency token or coin, usually for free, to numerous wallet addresses” and is “primarily implemented as a way of gaining attention and new followers, resulting in a larger user-base and a wider disbursement of coins.”

What’s a (Cryptocurrency) Fork?

A. A software change that causes a blockchain to split into two parallel blockchains that are not interoperable post-fork.

A fork is a popular term used in cryptocurrency, but in the context for this blog post, a fork refers to a split in the underlying blockchain (distributed ledger system) such that there are now two blockchains (imagine a fork-in-the-road). When a blockchain is forked, each chain contains a snapshot of the cryptocurrencies held by the addresses (in crypto terms, this snapshot is a record of Unspent Transactions Outputs (“UTXOs”)). These UTXOs represent the cryptocurrency “coins” held by the owners of the addresses. Post-fork, owners now have the same number of coins on each blockchain. When the owner decides to spend the coins (no longer a UTXO), the spent transaction only appears on one blockchain – leaving the same number of UTXO coins on the forked blockchain. Market forces will ultimately dictate whether the forked blockchain will have greater or lesser value than the pre-forked blockchain.

Most famous example of a cryptocurrency fork was the August 1, 2017 Bitcoin Core | Bitcoin Cash fork which gave holders of Bitcoin (Core) an equivalent amount of Bitcoin Cash post-fork. Some have looked at forks as providing “free money” and it appears that the IRS is among them.


Nothing herein constitutes tax advice or legal advice nor does this blog post create an actual or implied attorney-client relationship. Burrell Law, P.C. encourages all readers to seek competent legal and tax advice.