Cryptocurrency Hard Fork Taxes Explained

Hard forks occur when a cryptocurrency experiences a change in protocol that changes the ledger. These changes create a split in the ledger – the fork – which is a permanent division from the original ledger. Owners of the original chain receive a certain amount of currency on the new chain.

With a hard fork, you receive new coins, and the IRS counts these as taxable income at the time of coin creation. For more specifics, the IRS posted a revised ruling last year.

For example, let’s say you held 3 bitcoins (BTC) on October 23rd, 2017. The next day, Bitcoin gold (BTG) forked off of the BTC chain. Owners of BTC received a 1:1 distribution. On the new BTG network you would have 3 coins worth around $100 each, $300 total. You would have had to report the $300 as income on your 2018 tax return, regardless of what you did with the coins. Later, if you sold, traded, or exchanged the coins for goods or services, you would have to report the coins as either short- or long-term capital gains.

As a note, soft forks don’t create new cryptos, so you won’t have anything to report. However, airdrops are different. An airdrop is a promotion by exchanges or cryptos where new coins are given free to select wallets. If you receive any cryptos from an airdrop, they would count as income, just like if you mined the coins.

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