Interpretation of the new rules of the US Internal Revenue Service: Income tax due to the acquisition of virtual currency due to forks

Following the publication of tax guidance related to virtual currency in 2014, the US Internal Revenue Service (IRS) announced new tax guidance on October 9, 2019, which includes tax rules 2019-24 and FAQs.

Translation｜Liu Lang

Tax Rules No. 2019-24 answered the "tax treatment issues arising from the hard fork of virtual currency". The frequently asked questions are mainly aimed at the taxation of virtual currency transactions by those who use virtual currency as capital holders question.

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1. In terms of tax rules:

(1) When the taxpayer has not received the new virtual currency generated by the fork, it does not form the "gross income" stipulated in Chapter 61 of the Internal Revenue Code, and does not need to pay personal income tax;

(2) If the taxpayer has received the new virtual currency distributed (airdrop) to him based on the fork, then he has formed the "gross income" stipulated in Chapter 61 of the Internal Revenue Code and is subject to personal income tax.

2. Other:

(1) Define and distinguish between "virtual currency" and "cryptocurrency", and "cryptocurrency" is a type of "virtual currency";

(2) When a new virtual currency is obtained due to a hard fork, the tax base is based on the fair market value of the corresponding virtual currency at the time of acquisition; (From the previous case, the ICO refund "coin" is also calculated according to the investment price)

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Internal Revenue Service Rule 2019-24

(1) Whether the taxpayer has formed the "gross income" stipulated in Chapter 61 of the Internal Revenue Code before the taxpayer has received the new virtual currency generated by the fork.

(2) If the taxpayer has received the new virtual currency airdropped to him based on the fork, whether he has formed "gross income" under Chapter 61 of the Internal Revenue Code.

background

background

A virtual currency is a digital carrier of value that is a medium of exchange, a unit of account, and a store of value other than the U.S. dollar or foreign currency. Foreign currency is coins and banknotes of countries other than the United States that are designated as legal tender, circulate, and are generally used and accepted as a medium of exchange in the country of issue.

A cryptocurrency is a virtual currency that uses cryptography to secure transactions recorded on a distributed ledger such as a blockchain. Cryptocurrencies are often referred to as coins or tokens. Distributed ledger technology uses independent digital systems to record, share and synchronize transactions, the details of which are recorded in multiple places simultaneously without the need for central data storage or management functions.

A hard fork is unique to distributed ledger technology and occurs when the cryptocurrency protocol on the distributed ledger changes, resulting in a permanent diversion (diversion) of the original or existing distributed ledger . In addition to the cryptocurrencies recorded on the original distributed ledger, hard forks may result in the creation of new cryptocurrencies on the new distributed ledger. After the hard fork, transactions of new cryptocurrencies will be recorded on the new distributed ledger, while transactions of cryptocurrencies on the original ledger will continue to be recorded on the original ledger.

Distribution (airdrop) (that is, "airdrop", the chain method here translates it as "distribution"), distribution is the act of distributing cryptocurrency to many taxpayers who own distributed ledger addresses. After a hard fork, there may be an act of assigning a new cryptocurrency to the address holding the original cryptocurrency, but not all hard forks will result in distribution.

the case

the case

Scenario 1: A holds 50 cryptocurrency M. On a certain day (Date 1), due to the hard fork of the distributed ledger of M currency, N currency is generated, but N currency is not allocated or issued to A in other ways. .

Scenario 2: A certain B holds 50 encrypted currency R, and on a certain day (Date 2), due to the hard fork of the distributed ledger of R currency, S currency is generated. On the day of the fork, 25 S coins are allocated to B, and B can control them immediately after allocation. At this time, B has 50 R coins and 25 S coins. The distribution of S coins was recorded in the distributed ledger at a certain point (Time 1) of the day (Date 2), and at that time, the market fair value of 25 S coins was $50. The only reason B gets S coins is that B holds R coins at the time of the hard fork. After the distribution is over, the transactions of S coins are recorded on the new distributed ledger, and the transactions of R coins are recorded on the original ledger.

Law and Analysis

Section 61(a)(3) of the Internal Revenue Code provides that, unless otherwise required by law, gross income means all income from any source, including income from property transactions. Under this provision, all clearly realized income or undeniable property at the sole disposal of the taxpayer is included in the gross income. [See Commissioner v. GlenshawGlass Co., 348 US 426, 431 (1955)], unless it is a proceeds from the sale or exchange of capital assets, or special rules apply (such as Internal Revenue Code sections 1222, 1231, 1234A ).

Section 1011 of the Internal Revenue Code requires a taxpayer to determine a gain or loss on the sale or exchange of property on an adjusted basis that includes the cost or value of the fixed asset. adjusted to the amount after its improved value-added or depreciated depreciation as the basis for taxation) is the cost or other basis specified in section 1012, and adjusted in accordance with the provisions of section 1016. When a taxpayer acquires non-purchased property, unless otherwise specified, the tax base of the property is the total income, that is, the fair market value of the property when the property is acquired.

Section 451 of the Internal Revenue Code stipulates that for taxpayers using the cash basis of accounting, the actual or imputed income received is the gross income. Taxpayers using the accrual basis calculate gross income when all rights to acquire property during the tax year are determined.

Analysis of Scenario 1 and Scenario 2 based on the above laws

For scenario 1: Since A did not obtain N coins, A did not obtain property and no total income at the time of the fork.

For Scenario 2: B receives new property S coins, so taxable income is generated in the tax year when S coins are obtained. After being allocated and recorded in the distributed ledger, B has control and dominance over S coins, because B can dispose of S coins. B's total gain is $50, since the market fair value of 25 S coins is that much when recorded in the distributed ledger. The tax base of the S coin owned by B is 50 US dollars, and this income has been realized.

determination

(1) If the taxpayer did not acquire the newly minted cryptocurrency at the time of the fork, then he did not generate gross proceeds under Chapter 61 of the Internal Revenue Code.

(2) If the taxpayer obtains the new cryptocurrency based on the distribution of the hard fork, in general, it generates a total income (subject to income tax).

Drafting information for this rule

(slightly)