[klodolph]

From the FAQ:

> A21. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.

https://www.irs.gov/individuals/international-taxpayers/freq...

So with e.g. Bitcoin / Bitcoin Cash fork you would be doing ordinary capital gains, not income. You don’t have “new cryptocurrency”, you have the same cryptocurrency, but on two ledgers because of the fork.

[lacker]

I'm pretty sure the IRS considers BCH to be the new cryptocurrency in that scenario, and considers BTC holders to have "received new cryptocurrency".

The more I look through this ruling, the more it seems like it is only designed for people who hold their cryptocurrency at an exchange. At an exchange, the exchange officially declares which coin is the "new one" and which coin is the "old one", so that isn't a problem for users. Plus, there's a clear distinction with whether the exchange provided you with a new asset during the fork, or whether the exchange did not provide you with a new asset during the fork.

So if you just use Coinbase, this ruling is perfectly clear. If you control your own wallet, it doesn't make as much sense.

[panarky]

What exactly is the taxable event? When the source code for the fork is first published? When the first block is mined on the new chain?

If so, then there's probably no market for the asset at that instant, so the fair market value is zero?

When Ethereum hard-forked, some miners kept mining the old chain, now affectionately known as Ethereum Classic. Seems like Classic is the original asset and what we now call Ethereum is the new asset.

Let's say I paid $200 for 1 ETH before the fork, and after the fork I own 1 New ETH worth $195 and one 1 Classic ETH worth $5.

Do I now owe tax on $195 even though the total value of New ETH + Classic ETH equals my acquisition cost?

[lacker]

What exactly is the taxable event?

The taxable event is when the coin appears in your Coinbase account.

Oh, you have your own wallet? Well, the IRS wasn't really thinking about that case.

[arcticbull]

> Let's say I paid $200 for 1 ETH before the fork, and after the fork I own 1 New ETH worth $195 and one 1 Classic ETH worth $5.

> Do I now owe tax on $195 even though the total value of New ETH + Classic ETH equals my acquisition cost?

Let's say for simplicity sake that all this happened within the same calendar year. Here's where you're at.

You bought 1 ETC for $200 and now it's worth $5. That's a $195 unrealized capital loss.

Let's say you acquired your ETH from the fork and it was trading at $5 when you got it. You now have 1 ETH that has a cost basis of $5. This represents a $5 realized capital gain, and a $190 unrealized capital gain.

If you disposed of everything within the same year, it would be a complete wash, as your $195 capital loss would offset your $(190 + 5) capital gain.

If you carried your positions into the next tax year, you'd have to pay taxes on the $5 your ETH was worth when the fork happened at the end of year 1. Then in year 2, you have a $195 unrealized capital loss and a $190 unrealized capital gain. This would yield a $5 net capital loss, which you could use to offset other capital gains or carry forward into future years, deductible $3000 per year for the rest of your life.

In reality what happened though is that both ETH went up and ETC went up because a fork of a currency is just a copy-paste, as they have no intrinsic value and their performance afterwards is frequently totally uncorrelated other than in the way the whole crypto "market" is correlated to BTC.

[modeless]

> The more I look through this ruling, the more it seems like it is only designed for people who hold their cryptocurrency at an exchange.

I think you're absolutely right. The guidance only makes sense through this lens. It's unfortunate that the IRS didn't base their reasoning on the technical characteristics of the underlying blockchains. There is a whole lot of ambiguity as a result.

[arcticbull]

Nah, it's just up to you to justify the value of the asset when it forks. Frequently that's $0. If it's a meaningful fork, like BTC/BCH/BSV you could easily use the value at listing on the first exchange as the cost basis, as that's what everyone else will do in lieu of a 409(a) type valuation, which of course doesn't exist because crypto doesn't have intrinsic value. It just means more legwork for you. This is also addressed in A24 of the FAQ.

[zjs]

I'm not sure if numbering is stable (so perhaps this was A24 at one point), but I find this the most relevant portion of the FAQ:

Q27. I received cryptocurrency that does not have a published value in exchange for property or services. How do I determine the cryptocurrency’s fair market value?

A27. When you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, then the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs.

If there is not [yet] a published value at the time of the airdrop, A27 seems to suggest that "the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs". If you received the cryptocurrency in exchange for nothing, I'd conclude that the fair market value was $0.

(IANAL, IANYL, YMMV, etc.)

[dodobirdlord]

What the IRS likes to see in audits that involve questions that don't have clear answers is that you made a good-faith interpretation of the law and applied it consistently. You can even have picked the interpretation that benefits you, that's ok. If you did all of your taxes based on this logic, and subsequently paid capital gains tax on 100% of the value of any forked cryptocurrencies you sold I'd expect that to turn out fine for you even if the IRS ends up disagreeing. The IRS has an entire appeals process because they expect to encounter scenarios where there aren't clear answers.

An old but entertaining example, what's the inheritance tax value of a famous work of art that is illegal to sell because it contains a stuffed bald eagle?

https://www.nytimes.com/2012/07/22/arts/design/a-catch-22-of...

[nullc]

The text of the ruling is incredibly unclear.

You could read the ruling as saying that if you have coins on both the old system and the new system that you recieved an 'air drop' and owe taxes. Or you could attempt to read it as saying that you only received an 'air drop' if there was a "transfer" and not merely state copying.

The latter interpretation is more reasonable in effect but seriously frustrated by the total lack of guidance on setting the cost basis of the resulting assets! Also the language of the ruling comes very close to directly contradicting this interpretation: "Situation 1: A did not receive units of the new cryptocurrency, Crypto N, from the hard fork;".

The former interpretation is frustrated by the absurd result that users of eth, bcash, or other centrally administered frequently hardforking cryptocurrencies would owe income tax multiple times over for every one of those coins they own... even though the original systems have largely (but not completely) been ignored, and aren't valued as much. So what, are users of those systems supposed to have over and over against recognized ordinary income for nearly the total value of their holdings and sold the original coins and taken a capital loss on them (which they couldn't deduct against their ordinary income, except in a limited way)?

[wmf]

...total lack of guidance on setting the cost basis of the resulting assets...

"A24. If you receive cryptocurrency from an airdrop following a hard fork, your basis in that cryptocurrency is equal to the amount you included in income on your Federal income tax return. The amount included in income is the fair market value of the cryptocurrency when you received it. You have received the cryptocurrency when you can transfer, sell, exchange, or otherwise dispose of it, which is generally the date and time the airdrop is recorded on the distributed ledger. See Rev. Rul. 2019-24. For more information on basis, see Publication 551, Basis of Assets." (I realize the FAQ may not be legally binding, but there it is.)

[nullc]

Sorry, You've misunderstood my comment.

Some people, like the person I was responding to, are looking at Situation 1 in the ruling as saying that when a fork happens and there are two cryptocurrencies and you didn't receive any additional "new" cryptocurrency (just two, now independently spendable, copies of cryptocurrency you already had) that taxes aren't owed.

They adopt this reading in part because the only other interpretation of Situation 1 is that it's talking about an irrelevant and uninteresting case.

They imagine that you only owe taxes if in addition to the coins copied by the fork you also receive additional "air drop" units, Situation 2's 'owned 50, airdropped 25' contributes to that interpretation.

They think in situation 1 you have 50 coins of M and 50 coins of N and owe no taxes, and in situation 2 you have 50 coins of R and 75 coins of S and owe taxes on 25 S.

I think this interpretation doesn't work well, both because it's totally silent on the cost basis of the copied coins and because of the text at the top of page 5.

As a separate problem with this ruling, if you do adopt the view that when a fork comes into existence you "received" coins, there is usually no fair market value at that time because the coins were not tradable in any way until later. In some cases seen so far one side of the fork or another doesn't become effectively tradable for months, we may eventually see examples where a market doesn't form for years.

[In a few cases there is potentially a FMV at fork time, e.g. when there were liquid futures markets ahead of the fork (has only happened even arguably once, AFAIK), or when many market participants decided to give the new asset the old asset's ticker.]

[gamblor956]

Your misreading the ruling. It considers the forked coins to be new coins. However they're not income until actually received in your exchange account.

The cost basis of the new coins is $0 because you paid nothing to acquire them. If they have value when received for some reason, they take on the value you claim as income in your tax return. This may be possible if for example other exchanges have already enabled transactions in that fork and established a value.

[nullc]

> However they're not income until actually received in your exchange account.

What exchange account? -- yes, many (IMO foolish) users keep coins in exchanges, many don't. :)

I'd love to read it the way you're reading it.

> The cost basis of the new coins is $0 because you paid nothing to acquire them.

The document states:

> When a taxpayer receives property that is not purchased, unless otherwise provided in the Code, the taxpayer’s basis in the property received is determined by reference to the amount included in gross income, which is the fair market value of the property when the property is received.

So I guess you'd take the position that if you got access to the coins at the instant of the fork, when there is no FMV yet, then you'd report $0 income and have a $0 cost basis. Otherwise, if your access was delayed and there was a FMV, you'd treat that as income and it would become your cost basis?

[gamblor956]

What exchange account? -- yes, many (IMO foolish) users keep coins in exchanges, many don't. :)

Doesn't matter, only that you use an exchange for the guidance to apply. If you receive the coins directly, this guidance isn't really relevant.

So I guess you'd take the position that if you got access to the coins at the instant of the fork, when there is no FMV yet, then you'd report $0 income and have a $0 cost basis. Otherwise, if your access was delayed and there was a FMV, you'd treat that as income and it would become your cost basis?

Yes, correct. If the forkcoin is worth $X at the time of receipt, you are taxed on $X income because your cost basis at the time is $0. But because you were taxed on $X, your cost basis is set to $X.

[jkepler]

That 'guidance' isn't clear, as its quite frequent that when a hard fork occurs, there's speculation on the value of the new chain before the split, and high volatility after the split. In a number of cases, there aren't actually functional markets allowing price discovery for the new chain; thus the IRS hasn't yet given any guidance on establishing a new chain's cost basis.

[klodolph]

> You could read the ruling as saying that if you have coins on both the old system and the new system that you recieved an 'air drop' and owe taxes.

The text is fairly clear on this point, that a hard fork may or may not be followed by an airdrop, because it has a separate entry for “hard fork followed by airdrop” and “hard fork not followed by airdrop”.

So if you have a hard fork, and your old coins are now on two forks, that’s not income. “Hard fork without airdrop.”

I am not sure what else “hard fork without airdrop” could possibly mean.

Agreed that the cost basis for these coins is unclear.

[gamblor956]

Cost basis is very clear. It's zero, because there is no cost to acquiring the forked coins.

[klodolph]

Which ledger’s coins have the zero cost basis?

[gamblor956]

The forked/new ones, i.e., the ones you received because of the original crypto held.

[dragonwriter]

> The latter interpretation is frustrated by the total lack of guidance on setting the cost basis of the resulting assets!

IMO, the most reasonable interpretation without a specific basis-splitting rule, given that the IRS divides a hard fork into a legacy ledger a and a new ledger would be that the basis value for the new ledger entries (being that they are created by the fork at no cost) is zero, with the legacy ledger entries retaining their original basis value.

[nullc]

I agree that is a logically consistent position and wouldn't be entirely absurd. But I can't extract that position from their ruling.

It's also not one free of unexpected negative consequences in the case where the new system doesn't have a low value. Consider, a number of altcoins with more centralized administration have frequently hardforked and the ticker symbol and most of the value went to the new system while the old system was largely devalued.

So your policy would end up constantly resetting the holding period for these assets and the tax treatment would also be disadvantaged because it would tend to create short term gains and long term losses essentially out of nowhere.

E.g. You own Ethereum for two years. Then Eth hardforks to undo the execution of the DAO smart contract and return the lost funds eth's administrators. The original Ethereum continues, but the value and ticker symbol follow the new blockchain. A month later you sell all your coins. Did you just create a short term gain of the full value of the coins and a long term loss?

[gamblor956]

That is exactly how it should turn out.

The hard fork was ethereum's failure as a result of the technical inability to roll back the transactions the proper way (i.e., by just undoing the redactions themselves) and the tax law shouldn't be changed just for that.

[jkepler]

Your interpretation makes sense to me. However, the problem is that the IRS didn't actually state that in their limited guidance.

[dragonwriter]

I think it's the most reasonable reading of the guidance, but I would agree that it would be vastly superior if this (or some other treatment) was made quite explicit. Guidance should do a better job of guiding.

[nullc]

How do you square your interpretation with the text at the top of page 5?

It appears to be saying in situation 1 you have no N-coins at all. By exclusion, situation 2 would apply if you have the new coins and it clearly states taxes are owned on the market value in that case.

[gamblor956]

Not sure I understand your confusion. If you don't receive the forked coins (situation 1) you don't have income. It doesn't matter why you didn't get any of the forked coins.

[wmf]

It's not obvious that your interpretation is right. During the Bitcoin / Bitcoin Cash fork you received new BCH, especially if you "claimed" any UTXOs on the new chain.

[beaner]

You didn't receive anything new. You already had the keys. There was simply a new client created to let you access these alternative coins.

If you own bitcoin private keys, you already own coins on an infinite number of hard forks. You're just lacking a client to access them.

[X6S1x6Okd1st]

the IRS sees it differently.

[stale2002]

No, it does not.

The IRS specifically refers to when you recieves the tokens, on chain, in a transaction.

If there is no additional data, in the blockchain, then it is not an airdrop, according to the IRS.

[nullc]

Can you explain what the first couple lines about situation 1 on page 5 mean, according to your interpretation?

[stale2002]

Sure, In situation 1 is says the following:

"A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A."

So I interpret the line "Crypto N is not airdropped or otherwise transferred", too mean that there are no additional transactions that are recorded on the new blockchain N to give people additional coins, but previous state is maintained, as maintaining state is not a transfer.

An airdrop would have to be an actual state change, "recorded on the distributed ledger", that says "These people now receive 200 coins". In the case of a normal hardfork, there is no transfer that is "recorded on the distributed ledger".

I interpret that as meaning some sort of additional transaction, on the blockchain.

If you notice, in situation 2, the key line to look at is as follows:

"The airdrop of Crypto S is recorded on the distributed ledger on Date 2 at Time 1 ".

It specifically says that something must be recorded on the ledger.

The reason why situation 2 needs to be called out, specifically, would be in the case of a developer, hard forking a coin, and giving themselves a developer dividend, for example. It would make sense why the additional transactions, that are "recorded on the distributed ledger" would need to be taxed, as it is referring to additional coins being airdropped.

Edit:

Ah, you were also referring to this line here:

" A did not receive units of the new cryptocurrency, Crypto N, from the hard fork"

I'd interpret this the same way. The user did not receive any units of the cryptocurrency. They had it all along. It would take an actual state transfer for them to "receive" it.

It sounds weird to say, but basically, they had these coins already.

[bilbo0s]

Yeah. I'd encourage everyone to check with tax attorneys to be sure because klodolph's interpretation seems a bit suspect at first blush. Check with an attorney, or preferably two, just to be sure because the consequences for getting this wrong are nontrivial.