How Crypto Hard Forks and Airdrops Are Taxed

When a cryptocurrency has a hard fork, the blockchain splits into two separate chains. Often, hard forks happen as a blockchain upgrade where the majority of miners on the blockchain all agree to move to the new fork, thus no extra cryptocurrency is created. In the case of a soft fork, new additions to the chain are “backwards compatible” and no additional chain or cryptocurrency is created.

In some cases, a hard fork creates a separate cryptocurrency. The most prominent hard fork was the Bitcoin Cash (BCH) fork in 2017. Because fees were rising on the Bitcoin network, many felt that the Bitcoin block size should be larger. The new chain with a larger block size was split from the Bitcoin network, creating Bitcoin Cash. 

If you held Bitcoin on August 1, 2017, then you would have received the equivalent amount in Bitcoin Cash, assuming you held your assets in an up to date wallet or exchange. Similar forks have since taken place, for new assets like Bitcoin Satoshi Vision (Bitcoin SV / BSV) and Bitcoin Gold (BTG). 

The new 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 the 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. 

If you received 1 BCH on August 1, 2017, when the price of 1 BCH was $350 USD, then you would need to include that $350 of income on your 2017 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. 

To do so, 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.

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. 

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