{"id":6938,"date":"2023-03-15T17:05:04","date_gmt":"2023-03-15T17:05:04","guid":{"rendered":"https:\/\/www.irstaxapp.com\/?p=6938"},"modified":"2023-03-15T17:21:38","modified_gmt":"2023-03-15T17:21:38","slug":"taxation-of-cryptocurrency-hard-fork","status":"publish","type":"post","link":"https:\/\/www.irstaxapp.com\/taxation-of-cryptocurrency-hard-fork\/","title":{"rendered":"Taxation of Cryptocurrency Received on Hard Fork : What , When &#038; How ?"},"content":{"rendered":"\n<figure class=\"wp-block-image size-large is-resized\"><picture><source srcset=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-1024x576.webp 1024w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-300x169.webp 300w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-768x432.webp 768w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-150x84.webp 150w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-750x422.webp 750w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-1140x641.webp 1140w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork.webp 1200w\" sizes=\"(max-width: 1123px) 100vw, 1123px\" type=\"image\/webp\"><img src=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-1024x576.png\" height=\"632\" width=\"1123\" srcset=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-1024x576.png 1024w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-300x169.png 300w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-768x432.png 768w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-150x84.png 150w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-750x422.png 750w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork-1140x641.png 1140w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/03\/cryptocurrency-hard-fork.png 1200w\" sizes=\"(max-width: 1123px) 100vw, 1123px\" class=\"wp-image-6939 sp-no-webp\" alt=\"taxation of cryptocurrency\" decoding=\"async\" loading=\"lazy\"  > <\/picture><\/figure>\n\n\n\n<p>The cloud of mystery over the rule of <a href=\"https:\/\/www.irstaxapp.com\/are-cryptocurrency-donations-tax-deductible\/\">taxation of cryptocurrency <\/a>received by a person was removed when iRS issued <a href=\"https:\/\/www.irs.gov\/pub\/irs-drop\/rr-19-24.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">IRS Revenue Ruling 2019-24<\/a>.Now , it is known what will happen when you receive any cryptocurrency due to hard fork  implementation  on a blockchain network. This post is therefore entirely devoted to the taxation of virtual currency on account of a hard fork of a blockchain network.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_62 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-662d997d9bc53\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-662d997d9bc53\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.irstaxapp.com\/taxation-of-cryptocurrency-hard-fork\/#What_is_a_hard_fork\" title=\"What is a hard fork?\">What is a hard fork?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.irstaxapp.com\/taxation-of-cryptocurrency-hard-fork\/#Examples_of_the_famous_cryptocurrency_hard_forks\" title=\"Examples of the famous cryptocurrency hard forks\">Examples of the famous cryptocurrency hard forks<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.irstaxapp.com\/taxation-of-cryptocurrency-hard-fork\/#Taxable_Events_on_Hard_Fork\" title=\"Taxable Events on Hard Fork\">Taxable Events on Hard Fork<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.irstaxapp.com\/taxation-of-cryptocurrency-hard-fork\/#Taxation_of_cryptocurrency_received_on_the_hard_fork\" title=\"Taxation of cryptocurrency received on the hard fork\">Taxation of cryptocurrency received on the hard fork<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.irstaxapp.com\/taxation-of-cryptocurrency-hard-fork\/#Key_Points_on_taxation_of_cryptocurrency_received_on_hard_fork\" title=\"Key Points on taxation of cryptocurrency received on hard fork\">Key Points on taxation of cryptocurrency received on hard fork<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_a_hard_fork\"><\/span>What is a hard fork?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Before we proceed to hard fork, let us first understand what a fork is. A fork happens whenever a community of a specific blockchain changes the blockchain&#8217;s protocol by producing a second blockchain that shares all of its histories with the original but is headed off in a new direction.<\/p>\n\n\n\n<p>Hard forks can occur for various reasons, including disagreements among developers and users about the future direction of a cryptocurrency, security concerns, or the need to make significant changes to the code to improve the network.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Two types of fork<\/h3>\n\n\n\n<ol><li><strong>Soft fork:<\/strong>&nbsp;A soft fork sets a new standard agreeable to all. A soft fork does not create a new separate blockchain network. So, no new cryptocurrencies are issued on account of a soft fork. For this reason, there may not be any taxable events when a soft fork is implemented on a blockchain network.<\/li><\/ol>\n\n\n\n<ul><li><strong>Hard fork:<\/strong>&nbsp;When a hard fork happens, the blockchain splits into the original blockchain and an entirely new version blockchain following a new set of rules. It creates coins or tokens for the operation of the new version of the blockchain network.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Examples_of_the_famous_cryptocurrency_hard_forks\"><\/span>Examples of the famous cryptocurrency hard forks<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Here are the top four such cryptocurrencies which got birth on a hard fork of a blockchain<\/p>\n\n\n\n<ol><li>Bitcoin Cash (BCH): Bitcoin Cash was created in 2017 as a fork of Bitcoin. Bitcoin Cash has since forked several times, resulting in different versions of the coin, such as Bitcoin SV (BSV).<\/li><li>Ethereum Classic (ETC): Ethereum Classic was created in 2016 due to a contentious hard fork of the Ethereum blockchain. Ethereum Classic is the original Ethereum chain, operating on a Proof-of-Work consensus algorithm.<\/li><li>Litecoin Cash (LCC): Litecoin Cash was created in 2018 as a fork of Litecoin, which itself is a fork of Bitcoin.&nbsp;<\/li><li>Bitcoin Gold (BTG): Bitcoin Gold was created in 2017 due to a hard fork of the Bitcoin blockchain.&nbsp;<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Taxable_Events_on_Hard_Fork\"><\/span>Taxable Events on Hard Fork<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Thus, whenever new crypto coins or tokens generated on a blockchain&#8217;s hard fork are distributed to the community members of the original blockchain on which the hard fork was implemented, the issue of taxation of the value of new cryptocurrency in the hand of community members will arise. In other words, receiving new crypto coins from the new blockchain network is taxable as per <strong>IRS Revenue Ruling 2019-24.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Taxation_of_cryptocurrency_received_on_the_hard_fork\"><\/span>Taxation of cryptocurrency received on the hard fork<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The revenue procedure 2019-24 states that a receipt of cryptocurrencies due to hard fork in the wallet of a person is a taxable event. It means that an individual or business must include the value of new cryptocurrency as income in the year of receipt.&nbsp;The value of the new cryptocurrency is determined by its fair market value at the time it is received.&nbsp;<\/p>\n\n\n\n<p>This means that if an individual or business holds 1 Bitcoin (BTC) before a hard fork, they will have the same amount of the new cryptocurrency after the hard fork. For example, if the fair market value of the new cryptocurrency is $1,000, the individual or business will have to report $1,000 as income on their tax return.<\/p>\n\n\n\n<p>The Revenue Ruling 2019-24 has in fact gave following example to make its ruling:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote\"><p>Situation 2:&nbsp;<em>B&nbsp;<\/em>received a new asset,&nbsp;<em>Crypto S<\/em>, in the airdrop following the hard fork; therefore,&nbsp;<em>B&nbsp;<\/em>has an accession to wealth and has ordinary income in the taxable year in which the&nbsp;<em>Crypto S&nbsp;<\/em>is received. See \u00a7\u00a7 61 and 451.&nbsp;<em>B&nbsp;<\/em>has dominion and control of&nbsp;<em>Crypto S&nbsp;<\/em>at the time of the airdrop, when it is recorded on the distributed ledger, because&nbsp;<em>B&nbsp;<\/em>immediately has the ability to dispose of&nbsp;<em>Crypto S<\/em>. The amount included in&nbsp;gross income is $50, the fair market value of B\u2019s 25 units of&nbsp;<em>Crypto S&nbsp;<\/em>when the airdrop is recorded on the distributed ledger.&nbsp;<em>B<\/em>\u2019s basis in&nbsp;<em>Crypto S&nbsp;<\/em>is $50, the amount of income recognized.<\/p><cite>Page 5 of RR -2019-24<\/cite><\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Key_Points_on_taxation_of_cryptocurrency_received_on_hard_fork\"><\/span>Key Points on taxation of cryptocurrency received on hard fork<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\">1. It is property under the Internal revenue Code<\/h3>\n\n\n\n<p>If a hard fork creates a new cryptocurrency, the new cryptocurrency will be treated as&nbsp;<strong>property&nbsp;<\/strong>for tax purposes. All the taxation laws and rules that apply to a &#8220;property&#8221; as defined under section 317(a) of the Internal Revenue Code shall apply to new cryptocurrencies received on the hard fork.&nbsp;<\/p>\n\n\n\n<p><a target=\"_blank\" href=\"https:\/\/irc.bloombergtax.com\/public\/uscode\/doc\/irc\/section_317\" rel=\"noreferrer noopener\"><em>IRC \u00a7 317(a) Property<\/em><\/a><em>&nbsp;\u2014 For purposes of this part, the term &#8220;property&#8221; means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).<\/em><\/p>\n\n\n\n<p>So, when you sell, barter, trade, or exchange at a higher price than your basis, there will be either short- or long-term capital gains depending upon the cryptocurrency holding period before sale or trade.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2 Receipt is income in the year of receipt<\/h3>\n\n\n\n<p>A taxpayer who receives a new cryptocurrency due to a hard fork will have taxable income equal to the new cryptocurrency&#8217;s fair market value (FMV) when it is received. The FMV value will be includible as income in the tax year you receive the cryptocurrency.<\/p>\n\n\n\n<p>IRS, in its Revenue Ruling 2019-24 has given the following example of treatment of receipt of cryptocurrencies on hard fork.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. FMV to be determined with crypto exchange rate<\/h3>\n\n\n\n<p>The fair market value of the new cryptocurrency will be determined by the exchange rate on a cryptocurrency exchange that is available to the taxpayer.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">4. Holding period of cryptocurrency<\/h3>\n\n\n\n<p>The holding period of a &#8220;property&#8221; determines whether it is a short-term or long-term capital asset. So, the day the cryptocurrency is transferred to a person is the day the holding period will be counted.&nbsp;<\/p>\n\n\n\n<p>If you keep the cryptocurrency received on the hard fork for below 12 months, it is a short-term capital asset. So selling or trading within 12 months shall e short-term capital gains, and the gain or loss will be long-term if sold after holding for more than 12 months.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What happens when the crypto received on the hard fork is sold or transferred?<\/h3>\n\n\n\n<p>As earlier written, there will be capital gains or loss. The computation of capital gains or losses will be done as under :<\/p>\n\n\n\n<ul><li>Capital Gains\/Loss&nbsp;<strong>=&nbsp;<\/strong>Sale \/transfer consideration&nbsp;&nbsp;<strong>minus<\/strong>&nbsp;the basis (FMV value that was earlier considered income )<\/li><li>The holding period of crypto before the sale will decide whether is short-term or long-term.&nbsp;<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">The record maintenance requirement for the cryptos received on the hard fork under&nbsp;<\/h3>\n\n\n\n<p>Those engaged in cryptocurrency transactions should maintain detailed records of their transactions, including hard forks and the resulting new cryptocurrencies received. The best way is to use <a href=\"https:\/\/www.irstaxapp.com\/2023-list-of-10-best-crypto-tax-software-in-usa\/\">crypto accounting software<\/a>.This will remove the headache of keeping records of the trade, sales, or investments in cryptocurrencies, as many of them are synced documents with various popular wallets.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The cloud of mystery over the rule of taxation of cryptocurrency received by a person was removed when iRS issued IRS Revenue Ruling 2019-24.Now , it is known what will happen when you receive any cryptocurrency due to hard fork implementation on a blockchain network. This post is therefore entirely devoted to the taxation of [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":6939,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[3848],"tags":[],"amp_enabled":false,"_links":{"self":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/6938"}],"collection":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/comments?post=6938"}],"version-history":[{"count":2,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/6938\/revisions"}],"predecessor-version":[{"id":6942,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/6938\/revisions\/6942"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/media\/6939"}],"wp:attachment":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/media?parent=6938"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/categories?post=6938"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/tags?post=6938"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}