How are Crypto Hard Forks Taxed?
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Crypto hard forks result in the creation of a new branch in a blockchain, generating a corresponding new token. The IRS mandates that tokens received in a hard fork are taxable as income, with their fair market value at the time of deposit into a user's wallet serving as the basis for taxation.
If you sell the tokens acquired through a hard fork, any profits incurred are subject to capital gains tax. Capital losses from crypto transactions, including hard fork-related sales, can be utilized to offset the total gains, offering a potential tax benefit for investors.
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 subject to crypto taxes.[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.
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.
Frequently asked questions about crypto hard fork taxes
Here are answers to frequently asked questions about the tax consequences of crypto hard forks.
What happens to my crypto in a hard fork?
In a crypto hard fork, a fundamental change in a blockchain creates a new branch of the chain, leading to the formation of a new token. Notable examples include the Bitcoin fork that resulted in Bitcoin Cash and the Ethereum fork that split ETH Classic and ETH.
Is an airdrop of new cryptocurrency following a hard fork tax exempt?
No, crypto hard forks and the subsequent airdrops of new cryptocurrencies are typically not tax exempt. The IRS considers tokens received in a hard fork as income and taxes them at their fair market value when deposited into a user's wallet. This treatment aligns with how crypto airdrops are taxed for income purposes. Consult a crypto tax professional for guidance in your specific circumstances.
How is crypto trading taxed?
When you sell tokens received in a hard fork, profits are taxed as capital gains. The capital gains tax applies to the difference between the selling price and the fair market value at the time of deposit. Conversely, crypto capital losses incurred can typically be used to offset the amount of the total gain, providing a potential tax benefit.
What is the cost basis of a hard fork?
The cost basis of a hard fork is determined by the fair market value of the tokens received at the time of deposit into a user's wallet. For instance, if you receive new tokens valued at $4,335 in a hard fork, this amount becomes the cost basis for tax calculations. In subsequent transactions, such as selling the tokens, this cost basis determines capital gains or losses for tax reporting.
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Last reviewed by Tynisa (Ty) Gaines,EA on December 19, 2023 · Sources