The IRS Tax guidelines providedclarity about the tax treatment of cryptocurrency. This also included the rulings, which weremeant to guide the tax treatment related to hard forks.

A hard fork typically occurs whenthere is a protocol change leading to a new identity for the token. This means when the hard fork happens, thenew symbol with the new protocol on the new distributed ledger loses itsoriginal character, and it leads to the creation of a new cryptocurrency.

In one kind of hard fork, theinvestor does not receive any new cryptocurrency. In another scenario, the investors get unitsof a new cryptocurrency in the airdrop.

When there is no airdrop,investors do not own any new value. However, when there is an airdrop, the investor has access and ownershipof the old legacy cryptocurrency and the new units of currency in the airdrop.

The new guidelines provideclarity on the apparent issues when taxing these cryptocurrency units. This needs to be addressed because if thevalue of the cryptocurrencies received was high at a point in time and at alater point in time goes down as it is not getting full acceptance, then itbecomes a problem for the investor.

This means there will be acapital loss to the original cryptocurrency. And, the investor will give recognition to the ordinary income beingleft with no money to pay for the tax.

The new guidance states that thetaxpayer should recognize the income anytime the taxpayer gets domain andcontrol over a new type of cryptocurrency after a hard fork. Technically speaking, this will not apply toan airdrop, which happens without a fork.

While it appears that clarity hasbeen provided, there is a lot of confusion to be solved yet. It is not clear if these rules will apply tothe airdrops of Altcoins. There aresituations when the owners of wallets have not done anything to receive theairdrops, but land up getting them, and many times they are not even aware theyhave been dropped with units of crypto in airdrops.

If the taxpayers are donatingcryptocurrency to charity, then they need to estimate the fair market value,and that value will not be recognized as an income from cryptocurrency. Taxpayers will have to maintain recordsconcerning their cryptocurrency transactions like receipts, sales, andexchanges.

The confusion about the “resultof an airdrop of a new cryptocurrency following the hard fork.” It is not trulyresolved.