What does it mean to hold a so-called “fork” of a digital asset? Rep. Tom Emmer (R-Minn.) is asking the IRS to provide clarity on that issue.
On May 17, Rep. Emmer introduced the Safe Harbor for Taxpayers with Forked Assets Act—a bill that would protect taxpayers that own “forked assets” from any penalties and fees that the IRS may try to impose on them for holding those assets. If the legislation passes, forked-asset holders would be protected by this bill until the IRS provides clear guidelines for taxpayers who may find themselves in this situation.
What is a forked asset?
A fork of a digital asset is a digital currency that you may have received at no cost because you held another digital currency whose chain split into two separate chains. After the split, there are two digital assets instead of one, the original asset that you previously held (1), and a new asset that you have received because it split off of the original assets blockchain (2). After the split takes place, you are left with a balance of that new asset (asset #2) in the same amount that you had of the original asset (asset #1) because both assets have a shared blockchain history up until the block at which they fork into two distinct chains.
Why regulatory clarity is needed
What may have inspired Rep. Emmer to create this piece of legislation is the digital currency guidance that the IRS released in 2014 that said that digital assets are treated like property from a tax perspective. A few years later, in October 2019, the IRS released updated guidance that stated that the receipt of a forked virtual currency is a taxable event—and this is where the obstacles begin.
Individuals who hold forked assets automatically receive the forked asset at the time that a blockchain splits into two. That being said, some forked asset holders unwillingly and unknowingly receive the forked asset. If the IRS is saying that an asset fork is a taxable event, then they are creating a tax burden on individuals who may not have realized any sort of gain or loss, or even know that they received an asset that they are supposed to pay tax on; Rep. Emmer’s bill would protect these individuals until the IRS provides clarity on this issue.
“Just like every other federal agency, the IRS must keep up with the rapid pace of technology or risk losing American leadership in innovation. Taxpayers suffering from a lack of tax guidance are being unfairly punished for investing in an emerging technology. What has been issued by the IRS so far is not pragmatic and has not supported the technology nor those who engage with it,” said Congressman Emmer.
“We should be embracing emerging technologies and providing a clear regulatory system that allows innovation to flourish in the United States. A safe harbor will protect taxpayers until the IRS take steps to improve their guidance.”
Although the legal environment around blockchain and digital currency has improved over the years, it still has a long way to go. The blockchain and digital currency industries are still relatively new, and many of its participants are not entirely sure how existing law and legal frameworks apply to their digital currency holdings and blockchain-based activities.
What the world needs are guidelines from government agencies that can help them navigate blockchain and digital currency-related matters. Until those guidelines are created and published, legislature like the bill Rep. Emmer has proposed will protect digital asset holders until there is more clarity.
See also: CoinGeek Live panel on Regulation of Digital Assets & Digital Asset Businesses
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