Unforeseeable events not within the control of a property owner may impose adverse tax consequences. For example, financial regulators may require changes to the terms of a debt instrument that result in a deemed exchange of the existing debt instrument for a modified debt instrument, and therefore, generally, in the recognition of gain or loss. Earlier this month, the Internal Revenue Service and Treasury published guidance regarding the tax treatment of certain events not within the control of investors: (1) the transition from interbank offered rates (such as LIBOR) in debt instruments and non-debt contracts to other reference rates; and (2) a “hard fork” with respect to cryptocurrency in which the owner receives units of new cryptocurrency.

Transition From Interbank Offered Rates

In 2017, the U.K. regulator that oversees the London interbank offered rate (LIBOR) announced that all currency and term variations of LIBOR, including U.S.-dollar LIBOR, may be phased out after 2021. Given that USD LIBOR is used extensively as a reference rate in financial instruments, U.S. organizations regulating financial markets have been conferring to identify alternative reference rates that may be used to replace USD LIBOR and that will comply with relevant financial standards. One rate that has been identified by the Alternative Reference Rates Committee (ARRC), a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, to replace USD LIBOR, is the Secured Overnight Financing Rate (SOFR)—a rate based on transactions in the repurchase market for U.S. Treasury obligations that is published by the New York Federal Reserve Bank.