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So if I sell my newfound BCH today, which was birthed from thin air a few months ago, but originates from BTC I bought years ago, is it short term capital gains

So if I sell my newfound BCH today, which was birthed from thin air a few months ago, but originates from BTC I bought years ago, is it short term capital gains or long term?

CyrusL 9y ago
My understanding is that there is no consensus expert opinion on this.
quickthrower2 9y ago
IANAA but I imagine it is like a stock split.
- CyrusL 9y ago
  I don't agree with the stock split comparisons. Bitcoin Cash is not something that existed inside Bitcoin and was then spun out. It's more like a new company was formed and it's cap table was initialized as a copy of another pre-existing company. I think there just isn't any precedent for the concept of "forking" and how the internal revenue code applies to it.
  - quickthrower2 9y ago
    I see your point. This is something I can imagine lawyers arguing over and there is no right/wrong answer really. The cap table is interesting though. One could say it starts off at $0 but that isn't really true as there is a 'good will' value due to the public knowledge of the fork and that the coin will be worth something.
    - an_account 9y ago
      But if there was a “good will” value then you would had to have paid taxes on the value at the time of aquiring the asset (when the fork happened). You can’t just be gifted something of substantial value and not pay taxes on it.
      - quickthrower2 9y ago
        Yes that would make sense. It would be income tax then, right? If the coin crashes to 0 a week later, then you'd still pay it too, in theory.
        an_account 9y ago
        Yes, but I think you could write off the losses, so might equal out if it crashed to 0.
        bigtunacan 9y ago
        The parent's observation is that it is initially taxed as income. If it crashes to zero that is a capital gains loss so it is a write off against capital gains, not against income. So you still would have to pay taxes even though you have no money. The following are my observations from discussions with my accountant and reading some of the IRS tax codes and "guidance". Do NOT take this as tax advice In general (within the US) the tax code is treating crypto both as property AND as income. 1) Someone pays you in crypto - income 2) If you mine crypto it is treated as income. 3) If you purchase crypto it is treated as property. 4) If you HOLD crypto it is treated as property. To break down how this works in regards to taxes. If it is "income crypto" then you are liable for taxes on the value of the crypto at the "moment" you receive it. 1) For example, you received 1 token that is valued at $100 and your tax rate is 22% then you now owe $22 in income tax. If you hold that crypto and it goes to $0; you still owe $22 in income tax. To further complicate this though, the loss from the $100 to $0 IS a capital loss. So what this means it you made an extra $100 in income, but then you lost $100 in capital losses which you write down against your income so now you are back to owe-ing $0 in income tax on that $100. Now that may seem like a complicated way of saying you don't owe anything, but the catch is you can only write down $3000 a year of capital losses against your income. You can carry those losses over each year until it is wholly accounted for, but in the meantime, you could end up holding the bag and oweing a lot of money to the IRS. 2) If instead, you purchase 1 token that is valued at $100 and you hold it and it goes to $200 and then sell; you now owe capital gains taxes. If you held for less than 1 year then the $100 gain is classified as capital gains, but taxed like income. If you hold it for more than 1 year it is taxed at the capital gains rates.
    - gamblor956 9y ago
      Lawyers wouldn't be arguing over this. It's a well-settled point of tax law. BCH received in the split would be treated as free money received (because Bitcoins are currency, not equity interest), so as cash income, and thus would be taxed like cash income.
  - krrrh 9y ago
    It’s not like a stock split, but it is like a spinoff. It’s easier to compare it to a company being split into equal parts with roughly similar functions than the spinning off of a smaller division. Conceptually more like the splitting up of Ma Bell, or of ALDI into ALDI Nord and ALDI Süd. The only problem is that there is no entity that can issue a notice on how to assign the basis, which is how things are usually handled in equities. The price of BCH was all over the place immediately after the fork, though for a while the price of BTC+BCH was closer to the old price of BTC than BTC alone was, which is what you’d expect. See this post for an example of a duplicated cap table in an equity market. https://money.stackexchange.com/questions/23176/in-the-event-of-a-corporate-spin-off-how-can-i-calculate-the-correct-cost-basis#23179 https://money.stackexchange.com/questions/23176/in-the-event...
kevinyun 9y ago
The biggest concern in my head is not the prices of cryptos, but how much of a headache it will be to calculate taxes at year-end
- itsthejb 9y ago
  cointracking.info
  - kevinyun 9y ago
    Wow, this is great -- thank you so much for sharing!
dahdum 9y ago
Nobody knows what IRS says on the matter, but everyone I know of is treating it as a stock split with the holding period of original bitcoin . You do have to calculate an adjusted cost basis for the forked coins, at time of split (most common) or sale (sounds iffy).
erentz 9y ago
Short term capital gain with a cost basis of $0 makes the most sense.
- tehlike 9y ago
  More like dividends then?
- MichaelGG 9y ago
  And if Bitcoin Cash starts being recognized as Bitcoin? (Far fetched, but not in the Segwit2X case.) Use your original cost basis?
  - gamblor956 9y ago
    No, you treat it as free cash, so a basis of zero, because you didn't actually pay anything for the BCH and it's treated as income when received. On the other hand, when you sell the BCH, your basis will the FMV when received, so you would only be taxed the second time on the gain in price (if any).l
tedunangst 9y ago
BTC and BCH share the same ancestry. You bought both years ago. Like a heisencoin.
ohhhlol 9y ago
https://bitcoin.tax/blog/how-to-tax-bitcoin-cash-bch/ https://bitcoin.tax/blog/how-to-tax-bitcoin-cash-bch/ What if you had no interest in BCH but you owned 1,000 BTC. Do you suddenly have a $277,000 income tax bill? Yes, as discussed by Tyson Cross, tax attorney at BitcoinTaxSolutions.com. Since you have accession to wealth then this is taxable income.
- chrisco255 9y ago
  At what price would you go off of? The price when Coinbase granted access? Or the price of BCH when the actual fork happened?
  - elliotec 9y ago
    The actual fork, because that's when it became yours technically.
    - makomk 9y ago
      It was literally impossible for most holders to sell at the price when the Bitcoin Cash fork happened because none of the exchanges were accepting deposits. Part of the reason the price was so high then was exactly because people couldn't sell; it dropped as soon as deposits opened. (Since this happened at different times on different exchanges, the prices diverged quite a lot too.)
      - vkou 9y ago
        It's literally impossible for most holders of pre-ipo options to sell them, or their stock, but their tax bill is due the day the leave their employer, not the day that those options/stocks become liquid. Surprise, tax law isn't fair. Surprise, nobody is looking to change that.
- josephagoss 9y ago
  Here is a counter point I would argue. Anyone can make a Bitcoin fork, in fact Bitcoin forks are being made every week now. Is every Bitcoin holder now liable for that? Also these forks often collapse, so when was the income gain? The same day? You'd have people owing more tax than their entire net worth. (Forks often pump in the first day/week then drop to nothing.) If this is possible then you could attack every Bitcoin holder by making millions of forks each day and making lots of trades to give each fork real value. If you don't declare each fork you end up getting penalties. I would imagine a more sane way to deal with this is like how the ATO deals with Bitcoin mining. You mine Bitcoin but it's not realized until transferred to a third party. I would argue the same for forks. A fork is made, you have coins. But it's not like you received those coins. Technically you always had them as they are old coins just now on a different chain. If you sell the coins then it's a gain that you owe tax on. But forcing each user to track every fork as income is impractical and not viable. You'll see more of this as thousands of forks come into existence over the coming years. This is something I would actually look into getting a private ruling about.
nokcha 9y ago
Consider the following counterfactual: What if Bitcoin Cash had become accepted as the "true" Bitcoin and the original Bitcoin's market cap plummeted to near zero? Then you would treat it as a long-term capital gain if you sell it, right? Technically, there is little to distinguish a contentious fork from an upgrade to the Bitcoin protocol. As another counterfactual: What if the SegWit2x fork had happened, and each of the two resulting cryptocurrencies had roughly equal market cap and each claimed to be the "true" Bitcoin? I don't see how the IRS could coherently distinguish between these two cryptocurrencies and treat the sale of one as a long-term gain but a sale of the other as a short-term gain.
- gamblor956 9y ago
  I don't see how the IRS could coherently distinguish between these two cryptocurrencies and treat the sale of one as a long-term gain but a sale of the other as a short-term gain. It's trivial to distinguish between the two. One has existed for several years and the other came into existence in 2017. One goes by the name Bitcoin or Bitcoin Classic, and the other by the name Bitcoin Cash. Legally and for tax purposes, the technical underpinning of the currencies is irrelevant... The sale of Bitcoin Classic could be long-term gain because it could be held for >1 year (the threshold for LTG). The sale of Bitcoin Cash is short-term gain (for the 2017 tax year) because it came into existence in 2017. Note that Bitcoin Cash should not be treated as a stock split for capital gain purposes--generally you would not get to share the basis of your Bitcoin Classic holdings with your Bitcoin Cash holdings. You can do that with stock because tax-rules specifically provide this option for stock and equity ownership interests. Bitcoins aren't equity ownership interests, they're assets. If you acquired Bitcoin Cash through the fork, you received free assets, and you're taxed on it as if you received free money.
  - nokcha 9y ago
    >It's trivial to distinguish between the two.... One goes by the name Bitcoin or Bitcoin Classic, and the other by the name Bitcoin Cash. My comment about distinguishing was not about Bitcoin Cash, but about the following counterfactual: >What if the SegWit2x fork had happened, and each of the two resulting cryptocurrencies had roughly equal market cap and each claimed to be the "true" Bitcoin? In this hypothetical situation, there is (by assumption) real disagreement about which of the two cryptocurrencies is the "real" Bitcoin, and I don't see how the IRS would be equipped to decide this contentious issue. And if it doesn't make such a decision, then the only remaining possibility is to treat the two chains equally.
kc10 9y ago
IANAL, but I recorded the buy price as $0 for BCH I got in my transaction spreadsheet.
anonymous5133 9y ago
Neither, you have to wait until you get audited for them to tell you.
dumbfounder 9y ago
I would treat it as a dividend. If you roll it back in then don't pay taxes. If you sell it and take the cash then I assume it would be taxed based on when you bought the bitcoin. There is precedent here with trading stocks. (disclaimer: I am not an accountant)
- deleted 9y ago
  [deleted]
gamblor956 9y ago
BCH received in the fork should be treated like the receipt of free money: as income. So, you get taxed on that as if it were cash. If/when you later sell it, you will be taxed again on any gain in the value of the BCH at the time of sale as capital gain (but only on the gain, not the total value of the BCH). Alternatively, if the value has dropped, you will get a capital loss deduction. Whether it is short-term or long-term capital gains/losses depends on how long you've held the BCH at the time of sale. And yes, this is the consensus of the experts...especially the ones at the IRS...
- nokcha 9y ago
  >BCH received in the fork should be treated like the receipt of free money Why is that? Another way of looking at it is that the value of your existing bitcoin holdings got split between two competing chains. In a rational market, value of your bitcoin holdings pre-fork should be equal to the sum of the value of your holdings on the two post-fork chains.
  - gamblor956 9y ago
    Because the value of your Bitcoin holdings did not split. You had Bitcoin before, and the same amount of Bitcoin after, but also a new quantity of valuable other-Bitcoin. And let's not describe Bitcoin as a rational market...Even if that were true, it's not relevant to the tax treatment.
- yueq 9y ago
  IRS has real motivation to trace Satoshi now.

So if I sell my newfound BCH today, which was birthed from thin air a few months ago, but originates from BTC I bought years ago, is it short term capital gains or long term?

CyrusL 9y ago

My understanding is that there is no consensus expert opinion on this.

quickthrower2 9y ago

IANAA but I imagine it is like a stock split.

CyrusL 9y ago
I don't agree with the stock split comparisons. Bitcoin Cash is not something that existed inside Bitcoin and was then spun out. It's more like a new company was formed and it's cap table was initialized as a copy of another pre-existing company. I think there just isn't any precedent for the concept of "forking" and how the internal revenue code applies to it.
- quickthrower2 9y ago
  I see your point. This is something I can imagine lawyers arguing over and there is no right/wrong answer really. The cap table is interesting though. One could say it starts off at $0 but that isn't really true as there is a 'good will' value due to the public knowledge of the fork and that the coin will be worth something.
  - an_account 9y ago
    But if there was a “good will” value then you would had to have paid taxes on the value at the time of aquiring the asset (when the fork happened). You can’t just be gifted something of substantial value and not pay taxes on it.
    - quickthrower2 9y ago
      Yes that would make sense. It would be income tax then, right? If the coin crashes to 0 a week later, then you'd still pay it too, in theory.
      - an_account 9y ago
        Yes, but I think you could write off the losses, so might equal out if it crashed to 0.
        bigtunacan 9y ago
        The parent's observation is that it is initially taxed as income. If it crashes to zero that is a capital gains loss so it is a write off against capital gains, not against income. So you still would have to pay taxes even though you have no money. The following are my observations from discussions with my accountant and reading some of the IRS tax codes and "guidance". Do NOT take this as tax advice In general (within the US) the tax code is treating crypto both as property AND as income. 1) Someone pays you in crypto - income 2) If you mine crypto it is treated as income. 3) If you purchase crypto it is treated as property. 4) If you HOLD crypto it is treated as property. To break down how this works in regards to taxes. If it is "income crypto" then you are liable for taxes on the value of the crypto at the "moment" you receive it. 1) For example, you received 1 token that is valued at $100 and your tax rate is 22% then you now owe $22 in income tax. If you hold that crypto and it goes to $0; you still owe $22 in income tax. To further complicate this though, the loss from the $100 to $0 IS a capital loss. So what this means it you made an extra $100 in income, but then you lost $100 in capital losses which you write down against your income so now you are back to owe-ing $0 in income tax on that $100. Now that may seem like a complicated way of saying you don't owe anything, but the catch is you can only write down $3000 a year of capital losses against your income. You can carry those losses over each year until it is wholly accounted for, but in the meantime, you could end up holding the bag and oweing a lot of money to the IRS. 2) If instead, you purchase 1 token that is valued at $100 and you hold it and it goes to $200 and then sell; you now owe capital gains taxes. If you held for less than 1 year then the $100 gain is classified as capital gains, but taxed like income. If you hold it for more than 1 year it is taxed at the capital gains rates.
  - gamblor956 9y ago
    Lawyers wouldn't be arguing over this. It's a well-settled point of tax law. BCH received in the split would be treated as free money received (because Bitcoins are currency, not equity interest), so as cash income, and thus would be taxed like cash income.
- krrrh 9y ago
  It’s not like a stock split, but it is like a spinoff. It’s easier to compare it to a company being split into equal parts with roughly similar functions than the spinning off of a smaller division. Conceptually more like the splitting up of Ma Bell, or of ALDI into ALDI Nord and ALDI Süd. The only problem is that there is no entity that can issue a notice on how to assign the basis, which is how things are usually handled in equities. The price of BCH was all over the place immediately after the fork, though for a while the price of BTC+BCH was closer to the old price of BTC than BTC alone was, which is what you’d expect. See this post for an example of a duplicated cap table in an equity market. https://money.stackexchange.com/questions/23176/in-the-event-of-a-corporate-spin-off-how-can-i-calculate-the-correct-cost-basis#23179 https://money.stackexchange.com/questions/23176/in-the-event...

kevinyun 9y ago

The biggest concern in my head is not the prices of cryptos, but how much of a headache it will be to calculate taxes at year-end

itsthejb 9y ago
cointracking.info
- kevinyun 9y ago
  Wow, this is great -- thank you so much for sharing!

dahdum 9y ago

Nobody knows what IRS says on the matter, but everyone I know of is treating it as a stock split with the holding period of original bitcoin . You do have to calculate an adjusted cost basis for the forked coins, at time of split (most common) or sale (sounds iffy).

erentz 9y ago

Short term capital gain with a cost basis of $0 makes the most sense.

tehlike 9y ago
More like dividends then?
MichaelGG 9y ago
And if Bitcoin Cash starts being recognized as Bitcoin? (Far fetched, but not in the Segwit2X case.) Use your original cost basis?
- gamblor956 9y ago
  No, you treat it as free cash, so a basis of zero, because you didn't actually pay anything for the BCH and it's treated as income when received. On the other hand, when you sell the BCH, your basis will the FMV when received, so you would only be taxed the second time on the gain in price (if any).l

tedunangst 9y ago

BTC and BCH share the same ancestry. You bought both years ago. Like a heisencoin.

ohhhlol 9y ago

https://bitcoin.tax/blog/how-to-tax-bitcoin-cash-bch/ https://bitcoin.tax/blog/how-to-tax-bitcoin-cash-bch/ What if you had no interest in BCH but you owned 1,000 BTC. Do you suddenly have a $277,000 income tax bill? Yes, as discussed by Tyson Cross, tax attorney at BitcoinTaxSolutions.com. Since you have accession to wealth then this is taxable income.

chrisco255 9y ago
At what price would you go off of? The price when Coinbase granted access? Or the price of BCH when the actual fork happened?
- elliotec 9y ago
  The actual fork, because that's when it became yours technically.
  - makomk 9y ago
    It was literally impossible for most holders to sell at the price when the Bitcoin Cash fork happened because none of the exchanges were accepting deposits. Part of the reason the price was so high then was exactly because people couldn't sell; it dropped as soon as deposits opened. (Since this happened at different times on different exchanges, the prices diverged quite a lot too.)
    - vkou 9y ago
      It's literally impossible for most holders of pre-ipo options to sell them, or their stock, but their tax bill is due the day the leave their employer, not the day that those options/stocks become liquid. Surprise, tax law isn't fair. Surprise, nobody is looking to change that.
josephagoss 9y ago
Here is a counter point I would argue. Anyone can make a Bitcoin fork, in fact Bitcoin forks are being made every week now. Is every Bitcoin holder now liable for that? Also these forks often collapse, so when was the income gain? The same day? You'd have people owing more tax than their entire net worth. (Forks often pump in the first day/week then drop to nothing.) If this is possible then you could attack every Bitcoin holder by making millions of forks each day and making lots of trades to give each fork real value. If you don't declare each fork you end up getting penalties. I would imagine a more sane way to deal with this is like how the ATO deals with Bitcoin mining. You mine Bitcoin but it's not realized until transferred to a third party. I would argue the same for forks. A fork is made, you have coins. But it's not like you received those coins. Technically you always had them as they are old coins just now on a different chain. If you sell the coins then it's a gain that you owe tax on. But forcing each user to track every fork as income is impractical and not viable. You'll see more of this as thousands of forks come into existence over the coming years. This is something I would actually look into getting a private ruling about.

nokcha 9y ago

Consider the following counterfactual: What if Bitcoin Cash had become accepted as the "true" Bitcoin and the original Bitcoin's market cap plummeted to near zero? Then you would treat it as a long-term capital gain if you sell it, right? Technically, there is little to distinguish a contentious fork from an upgrade to the Bitcoin protocol. As another counterfactual: What if the SegWit2x fork had happened, and each of the two resulting cryptocurrencies had roughly equal market cap and each claimed to be the "true" Bitcoin? I don't see how the IRS could coherently distinguish between these two cryptocurrencies and treat the sale of one as a long-term gain but a sale of the other as a short-term gain.

gamblor956 9y ago
I don't see how the IRS could coherently distinguish between these two cryptocurrencies and treat the sale of one as a long-term gain but a sale of the other as a short-term gain. It's trivial to distinguish between the two. One has existed for several years and the other came into existence in 2017. One goes by the name Bitcoin or Bitcoin Classic, and the other by the name Bitcoin Cash. Legally and for tax purposes, the technical underpinning of the currencies is irrelevant... The sale of Bitcoin Classic could be long-term gain because it could be held for >1 year (the threshold for LTG). The sale of Bitcoin Cash is short-term gain (for the 2017 tax year) because it came into existence in 2017. Note that Bitcoin Cash should not be treated as a stock split for capital gain purposes--generally you would not get to share the basis of your Bitcoin Classic holdings with your Bitcoin Cash holdings. You can do that with stock because tax-rules specifically provide this option for stock and equity ownership interests. Bitcoins aren't equity ownership interests, they're assets. If you acquired Bitcoin Cash through the fork, you received free assets, and you're taxed on it as if you received free money.
- nokcha 9y ago
  >It's trivial to distinguish between the two.... One goes by the name Bitcoin or Bitcoin Classic, and the other by the name Bitcoin Cash. My comment about distinguishing was not about Bitcoin Cash, but about the following counterfactual: >What if the SegWit2x fork had happened, and each of the two resulting cryptocurrencies had roughly equal market cap and each claimed to be the "true" Bitcoin? In this hypothetical situation, there is (by assumption) real disagreement about which of the two cryptocurrencies is the "real" Bitcoin, and I don't see how the IRS would be equipped to decide this contentious issue. And if it doesn't make such a decision, then the only remaining possibility is to treat the two chains equally.

kc10 9y ago

IANAL, but I recorded the buy price as $0 for BCH I got in my transaction spreadsheet.

anonymous5133 9y ago

Neither, you have to wait until you get audited for them to tell you.

dumbfounder 9y ago

I would treat it as a dividend. If you roll it back in then don't pay taxes. If you sell it and take the cash then I assume it would be taxed based on when you bought the bitcoin. There is precedent here with trading stocks. (disclaimer: I am not an accountant)

deleted 9y ago
[deleted]

gamblor956 9y ago

BCH received in the fork should be treated like the receipt of free money: as income. So, you get taxed on that as if it were cash. If/when you later sell it, you will be taxed again on any gain in the value of the BCH at the time of sale as capital gain (but only on the gain, not the total value of the BCH). Alternatively, if the value has dropped, you will get a capital loss deduction. Whether it is short-term or long-term capital gains/losses depends on how long you've held the BCH at the time of sale. And yes, this is the consensus of the experts...especially the ones at the IRS...

nokcha 9y ago
>BCH received in the fork should be treated like the receipt of free money Why is that? Another way of looking at it is that the value of your existing bitcoin holdings got split between two competing chains. In a rational market, value of your bitcoin holdings pre-fork should be equal to the sum of the value of your holdings on the two post-fork chains.
- gamblor956 9y ago
  Because the value of your Bitcoin holdings did not split. You had Bitcoin before, and the same amount of Bitcoin after, but also a new quantity of valuable other-Bitcoin. And let's not describe Bitcoin as a rational market...Even if that were true, it's not relevant to the tax treatment.
yueq 9y ago
IRS has real motivation to trace Satoshi now.