Tokens received from hard forks are taxable income if a new token is received as a result of the hard fork.
Hard Fork Taxation
We largely covered this topic in our article on the taxability of airdrops. But for anyone searching specifically for hard forks, we wanted to make sure this information was easily accessible.
Hard forks of Bitcoin and Ethereum go back to 2014. At that time, BTC alone represented over 90% of the entire crypto market. This necessitated a response from the IRS, although it did take them nearly five years to issue one.
In 2019, the IRS released Rev. Rul. 2019-24. They noted the principles that we outlined in our airdrops article as well as our Gala Games node taxation guide. Most notably that:
“Cryptocurrency from an airdrop generally is received on the date and at the time it is recorded on the distributed ledger.”
“Section 61(a)(3) provides that, except as otherwise provided by law, gross income means all income from whatever source derived, including gains from dealings in property. Under § 61, all gains or undeniable accessions to wealth, clearly realized, over which a taxpayer has complete dominion, are included in gross income.”
So in the event that a hard fork results in the creation and receipt of a new token, that hard fork generates taxable income. RR 2019-24 illustrates this with an example:
“Situation 1: 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.
Situation 1: A did not receive units of the new cryptocurrency, Crypto N, from the hard fork; therefore, A does not have an accession to wealth and does not have gross income under § 61 as a result of the hard fork.”
Fewer and Fewer Taxable Events From Hard Forks
We don’t see many hard forks – or at least not “contentious hard forks” that come from internal disputes. They can be disruptive to the token, which of course most projects try to avoid. That’s one of the reasons we wrote about airdrops first. Airdrops occur very frequently and happen independent of hard forks (even though airdrops from hard forks are the reason airdrop-specific guidance exists).
But in the event that a hard fork does occur, and a new cryptocurrency is created because of it, you’ll need to claim it as taxable income.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
