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Splitt crypto1/28/2024 These competing versions share the same history up to the point where their core rules diverge.Īs an investor, if you receive a new crypto asset as the result of a chain split (such as Bitcoin Cash being received by Bitcoin holders), the value of the new crypto asset is not treated as either: Chain splitsĪ chain split occurs when there are two or more competing versions of a blockchain. There may be a chain split of the blockchain where there are competing versions. ĥ For details, see AICPA - Comments on IRS Virtual Currency Guidance.How to treat a new crypto asset you receive as a result of a chain split.Ī blockchain is a record of all transactions, made up of blocks, of a particular crypto asset.Īt regular intervals a new block is added to the chain. FAQs on Virtual Currency Transactions.Ĥ Rev. 5 ġ For a detailed explanation of hard forks see Tax Treatment of Cryptocurrency Hard Forks for Taxable Year 2017, containing comments by the Tax Section of the ABA to the IRS.Ģ Rev. What remains unaddressed are issues such as the fact that chain split coins received may constitute unsolicited property, given the fraud risks involved, and the possibility of intentionally deferring the moment of receipt of the chain split coin by an agent delaying the crediting of the coin to the beneficial owner. The income is valued as equal to the FMV of the cryptocurrency received at the time the receipt is recorded on the distributed ledger, or when control and dominion can be established, if this occurs at a later time. Once such dominion and control is established, the taxpayer is deemed to have received the cryptocurrency. Such dominion and control only exists once the new protocol of the split chain is supported by a cryptocurrency exchange. If a taxpayer receives new cryptocurrency as a result of a hard fork of the blockchain and the taxpayer has dominion and control over the cryptocurrency, i.e., they can transfer, sell, exchange, or otherwise dispose of the cryptocurrency, the cryptocurrency received constitutes ordinary income. 3 Hence, the IRS’s guidance is now undoubtedly applicable to chain split cryptocurrency received as a result of a hard fork. Yet, since then the IRS has made clear that the means by which a taxpayer receives cryptocurrency following a hard fork have no effect on its tax treatment. 2 A problem with the IRS's guidance was that the events in 2017 that necessitated this guidance, first and foremost the chain split of Bitcoin into Bitcoin and Bitcoin Cash did, arguably, not involve an airdrop as there is no distribution or transfer by a sponsor or developer, and hence the guidance was not understood to be applicable to the situation of many taxpayers in that year. The IRS has provided guidance on the tax treatment of coins received as a result of a chain split followed by an airdrop. The receipt of split chain cryptocurrency as a result of a hard fork has nothing to do with an airdrop, as commonly understood. 1 AirdropĪn airdrop is most commonly understood as a means of distributing units of cryptocurrency to multiple distributed ledger addresses without consideration, usually for promotional purposes. In this process, cryptocurrency holders may receive an equal number of split chain cryptocurrency units as they held on the original blockchain, while retaining their previous holding as well. A new blockchain will split off the original one and continue independently. Hard forkĪ persistent chain split of a blockchain (also called a hard fork) occurs when there is sufficient support among the miners of an existing blockchain to change the blockchain protocol, e.g., to introduce an alleged improvement, while also continuing the original blockchain. See also Blue J’s Crypto Tax blogs “ Tax treatment and reporting of cryptocurrency transactions” and “ How to calculate gains and losses on cryptocurrency transactions”. In the current article, we turn to the tax treatment of cryptocurrency taxpayers may receive as a result of a hard fork of a blockchain. We also flagged unresolved issues that taxpayers still face in the absence of further reliable guidance. In a previous blog post, we provided an overview of the tax treatment of income received from mining and staking based on the (limited) guidance available from the IRS.
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