Is a Crypto Hard Fork in the Blockchain Road a Taxable Event?

Is a Hard Fork in the Blockchain Road a Taxable Event

Is a Crypto Hard Fork in the Blockchain Road Taxed by IRS

When it comes to cryptocurrency taxes and the Internal Revenue Service, there are many different types of events that can occur beyond merely exchanging cryptocurrency for a different asset — or receiving it as a form of income. One of these types of events is referred to as a hard fork. Without delving too far into the technical aspects of the hard fork, it essentially means that there is a protocol change that results in a permanent diversion and a new ledger (aka a new version of the same or similar crypto is introduced). With the new ledger comes a potential mutation to the original cryptocurrency owned by the person – and it may result in receiving an airdrop or similar receipt for the cryptocurrency owner. The question becomes whether a hard fork is taxable at the time It occurs. As with any issue involving tax, the answer is… Maybe.

If No Airdrop Received After Hard Fork

If a hard fork occurs and the taxpayer does not receive new cryptocurrency –– usually by way of an airdrop –– then there is typically no taxable income.

As provided by the IRS:

• • • A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger.  This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. 

    • If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.

Received an Airdrop Transfer After Hard Fork

Under most circumstances, if a taxpayer does receive a Transfer/AirDrop after a hard fork, then that event is taxable in the year they receive the cryptocurrency:

As provided by the IRS:

• • • 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.

Calculating Hard Fork Income

As Provided by the IRS

• • • When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.

Determining Basis in Crypto Post Hard Fork

As Provided by the IRS

• • • If you receive cryptocurrency from an airdrop following a hard fork, your basis in that cryptocurrency is equal to the amount you included in income on your Federal income tax return. 

    • The amount included in income is the fair market value of the cryptocurrency when you received it.  You have received the cryptocurrency when you can transfer, sell, exchange, or otherwise dispose of it, which is generally the date and time the airdrop is recorded on the distributed ledger.  See  Rul. 2019-24.

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