Crypto Tax Ruling Addresses Hard Forks and Airdrops

October 16, 2019

The Internal Revenue Service (“IRS”) released a much-anticipated revenue ruling1 discussing the treatment of airdrops of cryptocurrency and hard forks of blockchains on which cryptocurrencies are recorded (the “Ruling”). In addition, the IRS also updated a series of FAQs published at

The Ruling describes an airdrop as a mechanism of distributing cryptocurrency to multiple digital wallets (i.e., distributed ledger addresses). Airdrops may or may not be preceded by a hard fork. The Ruling describes hard forks as a change in a blockchain’s protocol that results in a permanent diversion from the existing blockchain that may result in the creation of a new cryptocurrency on a new blockchain.

According to the Ruling, U.S. taxpayers that do not receive new cryptocurrency in a hard fork situation do not realize income for U.S. federal income tax purposes. The Ruling also provides that airdrops, including those following hard forks, generally will result in ordinary income to the recipient when the recipient first has the ability to transfer, sell, exchange or dispose of the airdropped cryptocurrency. If the taxpayer does not have the ability to transfer, sell, exchange or dispose of the airdropped cryptocurrency (e.g., where an exchange does not yet support the new cryptocurrency), the taxpayer does not recognize income at that moment in time. The amount that is recognized as income also becomes the taxpayer’s initial basis in the airdropped cryptocurrency.

For instance, token X undergoes a hard fork and all owners of X tokens are distributed new X-1 tokens. At the time of distribution, each X-1 token has a value of $10. Adam, a U.S. taxpayer, holds one X token in a private wallet and receives one X-1 token. Brenda, a U.S. taxpayer, holds one X token on an exchange-hosted wallet that does not yet support the X-1 token. One week later, the exchange initiates support for the X-1 token, when the tokens are trading at $15 per X-1 token. Adam has $10 of ordinary income, and $10 of initial basis in his X-1 token; Brenda has $15 of ordinary income, and $15 of tax basis in her X-1 token.

The FAQs are not official interpretations of law but are a clear indication of the IRS’s thinking around the treatment of various transactions involving cryptocurrency. The new FAQs provide information relating to: valuing crypto, determining basis, specific identification of crypto being sold, and gifts and charitable contributions of cryptocurrencies, among other topics. While “unofficial,” the FAQs are helpful insights and may be used to establish a reasonable basis for purposes of preparing and filing tax returns.

The Ruling and the FAQs do not answer all crypto tax questions but are welcome guidance. Earlier this summer, the IRS initiated a letter campaign, targeting taxpayers with crypto gains and losses and taxpayers identified as owning digital wallets. The Ruling may be useful for any taxpayers that are filing amended tax returns to report crypto gains and losses.

For additional information about the taxation of digital transactions, please contact Jon P. Brose (212-574-1615) or Brett R. Cotler (212-574-1269), or a member of Seward & Kissel’s Blockchain and Cryptocurrency Practice.


1 Rev. Rul. 2019-24. A revenue ruling is the IRS’s official interpretation of the U.S. federal income tax law and may be relied upon by taxpayers in determining their taxable income for U.S. federal tax purposes.