IRS Addresses Bitcoin Cash Fork, Four Years Later
May 4, 2021
At a glance:
- IRS announcement: In line with previous announcements, the IRS reiterated their position that taxpayers who received Bitcoin Cash following the hard fork in 2017 must report the value as taxable income.
- What it means: Cryptocurrency investors need to be diligent in reporting all virtual currency transactions (including the receipt of newly created cryptocurrencies) in the appropriate year and for the appropriate value or risk potential fines.
- Next steps: Any individuals or entities that owned Bitcoin in 2017 when the hard fork occurred and did not recognize the value of Bitcoin Cash at the time of the fork should assess whether an amended tax return is necessary.
You need to be proactive about your crypto-related tax liability. Contact Aprio’s Blockchain Accounting Services for a detailed assessment of your unique position.
The full story:
On April 12, 2021, the IRS finally released an official comment on the taxability of Bitcoin Cash received during the hard fork in 2017. Despite the four-year delay in commenting, the guidance provides crucial clarity during a time when hard forks are occurring with increasing frequency. Though this announcement specifically references taxpayers who received Bitcoin Cash as a result of the hard fork, the response provides reasonable insight into the expectations for similar hard forks and air drops that might result in the creation of new cryptocurrencies.
The announcement explains that any individual or entity who receives new cryptocurrency as the result of a hard fork must recognize the receipt as taxable income. However, the value and date of the receipt can vary depending on when the taxpayer obtained control over the new cryptocurrency. The significance of this clarification is best explained through the two scenarios provided by the IRS:
Scenario A: taxpayer has sole control over a private distributed ledger address
In this scenario, the taxpayer has total control over all units of cryptocurrency held in their distributed ledger. Because this taxpayer maintains that sole control, they can sell, transfer, or exchange the new cryptocurrency created by the hard fork as soon as it occurs. According to the IRS, this taxpayer should report the new cryptocurrency as income using the fair market value on the date and time of the hard fork.
In the Bitcoin Cash example, the IRS believe the taxpayer was required to include the receipt of Bitcoin Cash as income for the 2017 tax year, using the value of the cryptocurrency on August 1, 2017.
Scenario B: taxpayer utilizes a cryptocurrency exchange
In this scenario, the cryptocurrency exchange dictates when a taxpayer gains control because the exchange has ultimate deciding power over when (or if) to support a new cryptocurrency at the time the hard fork occurs. Withholding support is common during hard forks when there may be uncertainty regarding the security or viability of the new cryptocurrency. Therefore, the IRS believe this taxpayer should report the new cryptocurrency as income when they obtain the ability to sell, transfer, or exchange those assets, based on the fair market value at the time they gain that control of the asset.
Using the Bitcoin Cash example again, a taxpayer whose cryptocurrency exchange did not support Bitcoin Cash until January 1, 2018, would not have been expected to report the new units of cryptocurrency as income until the 2018 tax year, using the value of the cryptocurrency on January 1, 2018.
The clarifications provided in this announcement align with previous official IRS guidance and should come as no surprise. We’ve previously discussed the implications of Revenue Ruling 2019-24, which provided the first new guidance since 2014 on the taxability of virtual currency transactions and clearly stated that the receipt of new cryptocurrency due to a hard fork is considered taxable income, regardless of the distribution method.
When you filed your 2017 tax return did you:
- Ignore the bitcoin cash fork?
- Recognize income based on the perceived trading FMV and establish that date as your holding period for long term capital gains and the FMV as your basis?
- Take the position that you recognized the FMV as zero, moments before you received the forked token, and thus established a holding period date and basis of zero?
Depending on the position you took, you may want to consult with us to determine if any action is necessary. The scenarios described above show that your tax burden could vary dramatically depending on the date and time that you received control or took the position you received control. On the first trading day, the value of Bitcoin Cash ranged from $411.78 to $578.97, but that value jumped to $2,500 by January 1, 2018. Though you may have taken the position that the value was zero just prior to receiving the fork. With such a wide range in potential value and impact, it could be difficult to calculate your tax liability correctly.
- Don’t just take our word for it. Read Revenue Ruling 2019-24 in-full
- Yes, all airdrops are taxable income. Even airdrops for microtasking.
- More virtual currency reporting and compliance measures are imminent
If you have created or invested in any form of virtual currency, you very likely have related tax obligations. Additionally, blockchain companies creating or airdropping digital assets to taxpayers have unique tax and accounting challenges requiring a specialized strategy. Working with a knowledgeable advisor, like those at Aprio, is the best way to stay abreast of the frequent changes in cryptocurrency reporting and prevent painful audits or fines. In addition to helping individuals determine their cryptocurrency-related tax burden, our advisors provide blockchain companies with the necessary tax and accounting guidance to stay compliant with the latest regulations.
Aprio has been helping clients navigate the intersection of virtual currency and taxation since 2013, giving us the skills and experience to help you navigate even the most complex scenarios. Contact us today to start a conversation around your unique cryptocurrency tax position.
About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.