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May 8, 2023

IRS addresses taxation of digital currency

  • In Notice 2023-34, the IRS indicated that other countries' recognition of cryptocurrency as legal tender "for a limited purpose" does not change the treatment of that currency for US tax purposes.
  • In Chief Counsel Advice memorandum 202316008, the IRS concluded that a cryptocurrency owner did not have taxable income when the native blockchain of that cryptocurrency underwent a protocol upgrade with no change to the owner's cryptocurrency.

In two pieces of additional guidance on the taxation of digital assets, the IRS has reaffirmed (Notice 2023-34) its consistent position since 2014 that digital currency is not currency for US tax purposes, and advised that a change in the underlying protocol of a blockchain did not result in a taxable event for a holder of digital assets hosted on that blockchain (Chief Counsel Advice memorandum 202316008).

Notice 2023-34: cryptocurrency as legal tender

In response to some countries' adoption of cryptocurrency as legal tender, Notice 2023-34 updated prior guidance (Notice 2014-21) saying cryptocurrency was not legal tender in "any jurisdiction." Under Notice 2014-21, cryptocurrency is generally considered "virtual currency" and treated as property. Thus, tax principles for property transactions, rather than currency transactions, apply to transactions involving cryptocurrency.

The modification in Notice 2023-34 does not change the IRS's view that "convertible virtual currency" is not a currency and cannot generate foreign currency gain or loss for US federal tax purposes. The modified sentence reads: "In certain contexts, virtual currency may serve one or more of the functions of "real" currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but the use of virtual currency to perform "real" currency functions is limited." Following the change, the virtual currency addressed in Notice 2014-21 is no longer described as not having "legal tender status in any jurisdiction."

The IRS explained that the change to Notice 2014-21 does not affect the answers to the frequently asked questions (FAQs) in Section 4 of the Notice, specifically noting Q&A-2, which concludes that convertible virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes.


Taxpayers may have inferred from Notice 2014-21 that a digital currency would be treated as currency for US tax purposes if it became accepted as legal tender in another jurisdiction. The modification clarifies that another jurisdiction's adoption of a digital currency as legal tender for a "limited purpose" does not render that digital currency a "currency" for US federal income tax purposes.

While adopting legal tender for a limited purpose is not sufficient, it is unclear how extensively a digital currency would need to be used in a particular jurisdiction to be "currency" for US federal income tax purposes. In particular, it is not clear whether the IRS would ever accept as a "currency" a digital currency that was not used as a unit of account (i.e., used to set prices for goods and services), even if that digital currency were widely used as a medium of exchange in a particular jurisdiction.

This issue will likely continue to be debated; hopefully, additional guidance will address the nuances among virtual currency assets.

CCA 202316008: change in blockchain protocol

In CCA memorandum 202316008, the IRS concluded that a cryptocurrency owner did not have taxable income when the native blockchain of that cryptocurrency underwent a protocol upgrade with no change to the owner's cryptocurrency.

The IRS addressed the situation where a taxpayer purchased 10 units of cryptocurrency and stored them in an unhosted wallet. The cryptocurrency was native to a blockchain that underwent a protocol upgrade changing how transactions are validated (from proof-of-work to proof-of-stake). The protocol upgrade affected the consensus mechanism by which future transactions are validated and blocks are added to the blockchain but did not affect the transaction history of the cryptocurrency units. The upgrade also did not change any terms or aspects of the cryptocurrency units themselves and the taxpayer held the same 10 units following the upgrade. The taxpayer did not receive cash, services, or property as a result of the protocol upgrade.

The IRS concluded that the taxpayer did not realize a gain or loss under IRC Section 1001 and did not have an item of gross income under IRC Section 61(a). For purposes of IRC Section 1001, the upgrade did not alter past transactions or previously-validated transactions or blocks. Thus, the taxpayer's cryptocurrency remained unchanged, so there was no gain or loss. For purposes of IRC Section 61(a), the taxpayer did not derive any economic benefits (e.g., cash, services or other cryptocurrencies) from the upgrade, so there was no income inclusion.


CCA 202316008 does not label the cryptocurrency being discussed; given that Ethereum recently completed the "Merge," a highly publicized transition to the proof-of-stake consensus mechanism, in September 2022, the CCA may be addressing a taxpayer who held Ethereum tokens during the Merge.

CCA 202316008 is helpful in providing guidance on the factors that a taxpayer should consider when determining whether a particular event involving a blockchain protocol results in a realization event. The IRS's statement that the upgrade did not "change any terms" of the cryptocurrency is interesting, given that proof-of-stake protocols, but not proof-of-work protocols, enable owners of tokens to earn staking rewards. That is, the Merge gave the owner the ability to earn staking rewards on the cryptocurrency, which the owner could not do before the merge. Apparently, however, the IRS did not consider this change to the cryptocurrency significant in analyzing whether IRC Section 1001 applied to the transition.


Contact Information
For additional information concerning this Alert, please contact:
Financial Services Office
   • Thomas M. Shea, Crypto Tax Leader (
International Tax and Transactions Services
   • Colleen O’Neill (
International Tax and Transactions Services – Financial Services Office
   • Lauren L. Lovelace (
International Tax and Transactions Services – Capital Markets
   • Lee Holt (
   • Matthew A. Stevens (
   • Lena Y. Hines (
   • Huvie Weinreich (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor