How are Crypto Hard Forks Taxed?
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Crypto hard forks are taxed as income at their FMV when they are deposited into a user's wallet.
Crypto hard forks occur when a community decides to make fundamental change in a blockchain that results in its new blocks no longer being backward-compatible with its old blocks. This creates a new branch of the chain, and a corresponding new token. In other, plainer terms, the old chain follows one set of rules and the new chain follows another.
Notable hard forks include the Bitcoin fork that created Bitcoin Cash and the Ethereum fork that split ETH Classic and ETH.
Are there taxes on crypto hard forks?
The IRS has been clear that crypto hard forks are taxed.[1] After a hard fork, holders of the original token receive the same number of tokens they had on the original chain on the forked chain. These tokens are taxed as income at their fair market value at the time they were deposited into a user's wallet. This is the same way crypto airdrops are treated for tax purposes.
Airdrops income example
If before the BCH fork you had 15 BTC, you would still have 15 BTC, but you would also have 15 BCH, which would be valued at about $4,335 on the day of the fork. You would pay income taxes on that $4,335.
If you sell the tokens you received in a hard fork, any profits will be taxed as capital gains. Any capital losses can be used to offset your total gains amount.
Airdrop capital gain example
Let's say you decide to sell the 15 BCH you received from a hard fork, which was valued at $4,335 when it was deposited into your wallet. Five years later, it's worth $1,625. You would be able to claim a $2,710 capital loss on your taxes.
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Last reviewed by Tynisa (Ty) Gaines,EA on October 18, 2022 · Sources