10/26/2020

Is Crypto Digital Gold? Taxing Hard Forks

By Diana Myers, Co-Author

Imagine this: You own a cryptocurrency. Maybe it is Bitcoin. Maybe it is Ethereum. Maybe it is one of the thousands of other cryptocurrencies. One morning, a coalition of skilled software developers, aggressive business leaders, and innovative marketers announces its intent to “hard fork” your cryptocurrency’s blockchain.

So, what is a hard fork? A hard fork, in the simplest terms, means that one currency becomes two currencies. The original currency continues as the old blockchain, which we can think of as Chain A. And the newly forked currency is a new blockchain that begins on the date of the hard fork. We can think of this as Chain B. The computer networks, and the protocols that govern communication between computers on the network, also split. The result is two disparate networks.

The article examines the federal income tax consequences of cryptocurrency hard forks. The authors assume that the currency is decentralized and trustless, like Bitcoin, as opposed to a more centralized currency like Stellar or Ripple (again, explained later). They argue that a taxpayer who receives a new currency from a hard fork should not be taxed until s/he spends the new currency or converts it into U.S. dollars.

Please click here to download the full article: Is Crypto Digital Gold? Taxing Hard Forks.

About the Authors:

Ryan Connelly is the CEO and founder of Quad IO, Inc. and a nationally recognized cryptocurrency expert. Diana Myers is a tax associate at Holland & Hart LLP in Jackson Hole, Wyoming. The authors thank David Pope, Sarah Haradon, Karen Dean, and Jeffrey Pope for their helpful comments.

This article originally appeared in Tax Notes Federal, October 26, 2020, a publication of Tax Analysts. Reprinted with the publisher’s permission.

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