IRS Updates Hard Fork Guidance

Recently, the IRS clarified the conditions under which hard forks give rise to taxable income: only when there is an airdrop of new cryptocurrency to the taxpayer’s account.

The standard for realization of income is ‘dominion and control,’ and it seems logical to expect that only the means to buy, sell, send, receive, or transfer new cryptocurrency would give rise to reportable income. However, in prior IRS guidance, the IRS seemed to falsely assume that airdrops necessarily occurred in connection with hard forks, leaving many puzzled as to whether they had income when a hard fork had occurred, but new cryptocurrency hadn’t been received.

In situations where an exchange does not yet support the new cryptocurrency, the distinction becomes meaningful. When Bitcoin Cash was received as a result of the August 1, 2017 hard fork, many exchanges hadn’t yet added support for Bitcoin Cash, and so taxpayers may have lacked dominion and control until a particular exchange began supporting Bitcoin Cash. Perhaps in December 2017, or perhaps in calendar year 2018.

Perhaps most significantly, in acknowledging that hard forks need not immediately give rise to taxable income, the guidance has likely refocused future discussions squarely on what arrangements amount to ‘dominion and control’…

Here is a link to the IRS’s guidance, released April 9.


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