The IRS just released additional guidance on virtual currency and how it should be treated for income and gift tax purpose. Revenue Ruling 2019-24 and expanded FAQ (Frequently Asked Questions) were issued this week. Both of these reference other materials from the IRS that help taxpayers comply with tax rules related to this new digital application.
The Revenue Ruling deals specifically with cryptocurrency that goes through a “hard fork” and may or may not then have an “airdrop” of the new cryptocurrency to your account. A hard fork is where there is a diversion (as the result of a protocol change) from the legacy (old) distributed ledger to a new distributed ledger that has a new cryptocurrency. The legacy ledger does not disappear; you still have access to it. Just all future transactions will be on the new ledger using the new cryptocurrency. An airdrop is where, as part of the change, you are given units in the new cryptocurrency (a taxable event, but hopefully a good thing!).
The rules are similar to normal transactions where the US dollar value is to be used to determine the amount of the income or gain/loss on the transaction. With gifts, there is a carryover of basis issue that has always been a challenge. The IRS states that if you do not know the basis of the donor, the basis is zero.
The time of transaction is dependent upon when you gain control over the cryptocurrency. This would normally be when you would be able to sell it. The FAQ provide guidance on how you should determine the fair market value (US dollar amount) of the transaction. Just transferring a cryptocurrency between wallets, addresses or accounts belonging to you does not result in the recognition of income. However, exchanging one cryptocurrency for another will trigger a gain or loss.