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From the FAQ: > A21. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledge

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/frequently-asked-questions-on-virtual-currency-transactions 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.

nullc 7y ago
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)?
- dragonwriter 7y ago
  > 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.
  - jkepler 7y ago
    Your interpretation makes sense to me. However, the problem is that the IRS didn't actually state that in their limited guidance.
    - dragonwriter 7y ago
      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 7y ago
        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 7y ago
        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.
        7y ago
wmf 7y ago
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.
- bilbo0s 7y ago
  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.
- beaner 7y ago
  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 7y ago
    the IRS sees it differently.
    - stale2002 7y ago
      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 7y ago
        Can you explain what the first couple lines about situation 1 on page 5 mean, according to your interpretation?
        stale2002 7y ago
lacker 7y ago
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.
- modeless 7y ago
  > 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 7y ago
    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 7y ago
      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.)

nullc 7y ago

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)?

dragonwriter 7y ago
> 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.
- jkepler 7y ago
  Your interpretation makes sense to me. However, the problem is that the IRS didn't actually state that in their limited guidance.
  - dragonwriter 7y ago
    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 7y ago
      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 7y ago
        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.
        7y ago

wmf 7y ago

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.

bilbo0s 7y ago
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.
beaner 7y ago
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 7y ago
  the IRS sees it differently.
  - stale2002 7y ago
    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 7y ago
      Can you explain what the first couple lines about situation 1 on page 5 mean, according to your interpretation?
      - stale2002 7y ago

lacker 7y ago

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.

modeless 7y ago
> 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 7y ago
  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 7y ago
    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.)