CCA 202114020, the IRS ruled on the issue of whether a taxpayer who received Bitcoin Cash as a result of the August 1, 2017, Bitcoin hard fork has gross income under section 61 of the Internal Revenue Code (Code)?
The IRS reached the conclusion that, yes, a taxpayer who received Bitcoin Cash as a result of the August 1, 2017, Bitcoin hard fork has gross income because the taxpayer had an accession to wealth under section 61 of the Code. See Revenue Ruling 2019-24. The date of receipt and fair market value to be included in income will be dependent on when the taxpayer obtained.
IRC Sec. 61(a)(3) provides that gross income means all income from whatever source derived, including gains from the sale or exchange of a property. The term "property" includes services and the right to use property, but it does not include money. (Code Sec. 1273(b)(5))
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the U.S. dollar or a foreign currency. (FAQ 1, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))
Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality. (FAQ 3, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))
A "hard fork" occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the existing distributed ledger. A hard fork may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. Following a hard fork, transactions involving the new cryptocurrency are recorded on the new distributed ledger, and transactions involving the legacy cryptocurrency continue to be recorded on the legacy distributed ledger. (FAQ 22, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))
An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. (FAQ 22, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))
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