IRS: Hard forks not taxable if no new crypto is received

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There’s no doubt that the cryptocurrency ecosystem carries with it a lot of implications tied to legal issues, financial issues and even tax issues. The U.S. Internal Revenue Service (IRS) is trying to help crypto enthusiasts understand their tax responsibilities more clearly and has just released new guidance pertaining to a particular aspect of the industry – the hard fork.

According to the new guidance published by the IRS, hard forks won’t result in any tax liability, provided no new crypto is received as a result. The tax agency explains:

“A taxpayer does not have gross income under [Section 61] as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency.  A taxpayer has gross income, ordinary in character, under [Section 61] as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.”

The IRS, which has previously deemed digital currency to be a form of property, provides a definition of a hard fork, stating that it is an action that takes place on a distributed ledger that undergoes a protocol change. That change typically results in a permanent separation of the original digital asset and the creation of a new, distinct asset on a separate distributed ledger. Transactions from the original asset continue to be recorded on the legacy ledger and those of the newly created asset will appear on the new one.

The understanding of what constitutes “receiving” crypto assets makes a big difference. With relation to airdrops, the IRS makes a determination of what would be considered having received the crypto, explaining:

“For example, a taxpayer does not have dominion and control if the address to which the cryptocurrency is airdropped is contained in a wallet managed through a cryptocurrency exchange and the cryptocurrency exchange does not support the newly-created cryptocurrency such that the airdropped cryptocurrency is not immediately credited to the taxpayer’s account at the cryptocurrency exchange. If the taxpayer later acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency, the taxpayer is treated as receiving the cryptocurrency at that time.”

This will make a difference when it comes time to pay taxes. If it happens that the assets are not received before the end of the calendar year, they would not be included on that year’s tax filing. However, they would need to be included the following year if received anytime during that subsequent 12-month period.