IRS guidance for crypto hard fork tax
In 2019, the IRS released new guidance which reinforced many existing crypto tax situations as well as offered clarity for previously unclear situations, including hard fork tax treatment.
In answers 22 through 24 of their new guidance, the IRS clarified that “if a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you receive that cryptocurrency.” This means that if you receive crypto in a hard fork, you may have to report it as income on your tax return.
The IRS further states that the income is equal to the fair market value of the crypto when you received and took full control of it. The cost basis is equal to the amount of income that you claimed.
Let's say you received 1 BCH on August 1 of this tax year, and let's say the price of 1 BCH at that point was $350 USD. Then, you would need to include that $350 of income on this year's tax return. The cost basis of that 1 BCH would be $350.
This same logic applies to airdrops: you recognize income on the USD value of any crypto you receive as an airdrop.
How to account for hard forked coins with TokenTax
In order to properly recognize income as well as to establish the correct cost basis for coins received in a hard fork, it’s important that you enter in the hard forked coins in TokenTax's cryptocurrency tax software.
Go to the TokenTax manual entry screen. Set the transaction type to “income” and in the buy amount and buy currency columns, enter in the crypto that you received in the hard fork.
For the date, enter the date when you came into control of the hard forked asset.
For exchange, you can enter whatever helps you remember the transaction, e.g. “BCH Fork.”
After adding in any income transactions, you’ll see the total income amount for the tax year reflected on your dashboard. Any sales of that hard forked asset will account for the proper cost basis.
What is the BCH fork date?
If you're looking to account for BCH coins received when Bitcoin Cash hard forked from Bitcoin, you'll want the date of which you received the forked coins. The Bitcoin Cash fork occurred on August 1 of this tax year. You can confirm the exact time via the deposit records on the exchange or wallet where you were holding BTC.
Controversy over the new IRS hard fork guidance
The IRS’s new stance on how hard forks and airdrops should be taxed has not been without controversy. Crypto holders don’t have a choice whether or not they want to accept a hard forked coin.
As a result, people may receive an asset and are obligated to pay tax on it, even though they didn’t ask to be given crypto. Per the IRS, income tax is claimed once a user has technical control over the asset, not when they actually use it or sell it.
The asset may drop significantly in value after being given out in a fork due to people selling their received assets. This means that you may be liable for income on a coin that ultimately you take losses on, and you can’t offset that income with the capital losses beyond the $3,000 deduction.