Did you receive new crypto from a hard fork and are wondering about taxes?
Well, depending on your country, receiving hard forks impacts your crypto taxes more than you can imagine at first. Today, we explore how soft and hard forks are taxed across countries.
If you wondering about all the taxable events in the US around trading crypto, check our comprehensive guide.
In this article:
Top ways hard forks impact taxes:
When a hard fork occurs, you receive new cryptocurrency, and you’ll have taxable income in the United States.
In the UK, you have a taxable event when you dispose of the new coins. Pay special attention to the determination of the basis costs according to the “share pool accounting” method.
Other countries such as Singapore show a similar tax approach to the UK, while others remain unclear to this specific situation, suggesting more precaution.
Pay attention to the type of wallet/exchange you use due to determining the market value at the time of the hard fork besides making sure you keep records of every transaction.
Wait, what are hard and soft forks?
A soft fork occurs when developers change the protocol of a currency without causing any split in the network.
As a result, it doesn’t affect holders since it gives no room for the creation of a new currency. In this case, holders remain with the same amount of currency they had before.
On the other hand, a hard fork is a split in the distributed ledger of a currency, meaning developers break from the old protocol to generate a new one, creating a new currency.
Most notable examples include the numerous hard forks from Bitcoin’s original protocol, resulting in currencies such as Bitcoin Cash. Currently, there are 105 Bitcoin forks, while the majority are still active projects.
Which hard forks can you claim?
In the case of a hard fork, you’ll receive new units from the currency you originally held. A worthwhile aspect to consider in this case is the split ratio. You can think about it as your reward ratio.
In the case of the hard fork resulting in Bitcoin Cash, Bitcoin holders benefited from a 1:1 ratio.
As a result, an investor received the same amount of BCH (Bitcoin Cash’s token) that they held in Bitcoin. If you had 1 BTC, your portfolio would have 1 BTC and 1 BCH after the fork.
How to claim your new hard forks?
The promise of new cryptocurrency given by a hard fork may sound too good to be true. Well, sometimes it can be. As a result, one of the first things to do is to evaluate the legitimacy of the new hard fork.
After that initial evaluation, aside from its technical ambitions, there are some logistical steps to take. Most notably, evaluate what wallets/exchanges are supporting the new hard fork currency besides being able to import your private keys safely.
The importance of accessing the “worthiness” of each hard fork comes with the security threat of exposing your private keys and possibly losing funds.
Do you pay taxes on soft forks?
Now that we covered the basics of hard forks, let’s explore how taxes come into the picture.
Concerning soft forks, since you’re not receiving any new cryptocurrency and this only impacts the original protocol, taxes do not come into play across countries.
In the US, the IRS indicates the lack of income from soft forks as the reason for a non-taxable event:
“Because soft forks do not result in you receiving new cryptocurrency, you will be in the same position you were in prior to the soft fork, meaning that the soft fork will not result in any income to you.”
How hard forks impact taxes?
Taxes differ across countries when accessing the impact of a hard fork since that involves the reception of new cryptocurrency. Let’s explore how in the US, UK, Germany, and Singapore.
1. Hard forks are taxable events in the US
According to the IRS crypto guide, when receiving new coins from a hard fork and you full “dominion and control” of them (e.g., exchange for other currencies, transfer funds from one wallet to another), you:
“will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger.”
Recording the fair market value (in USD) when the transaction occurs can be more tricky if you use decentralised exchanges. In that case, the fair market value equals:
“The amount the cryptocurrency was trading for on the exchange at the date and time the transaction would have been recorded on the ledger if it had been an on-chain transaction”.
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Bear in mind that the taxable income only occurs when you claim the new cryptocurrency. If a currency you hold goes through a hard fork, but you can’t claim it for some reason, you won’t have taxable income.
2. Taxes with Hard forks in the UK
In the UK, the same distinction between soft and hard forks applies. When receiving new coins from a hard fork, taxpayers do not face a taxable event at that time.
However, it has an impact on correctly accessing the “allowable costs” when you sell a fraction of your entire holdings since it affects your final gain and, consequently, the amount to be paid in taxes.
The HMRC calls it a “share pool accounting” to balance out the cost of purchase at different points in time (at different rates) while distinguishing between cryptocurrencies.
As a result, “after the fork the new crypto assets need to go into their own pool,” but the allowable costs concerning the acquisition of the original crypto are split between both assets (the original and the new).
The HMRC crypto-asset tax guide does not advise on a particular “apportionment method,” while advising a “just and reasonable basis under section 52(4) Taxation of Capital Gains Act 1992” when splitting costs.
The process above applies if you’re an individual, while the tax implications differ if you’re a professional trader or a business. Moreover, the capital gains tax rate will depend on your total income bracket for the tax year (ended on April 5, 2020), among other factors.
3. Do you pay taxes on hard forks in Germany?
In Germany, the tax code doesn’t isolate the hard fork situation.
However, as we explored in a previous article, if you hold cryptocurrencies in the long-term, you’re not subject to taxes. The rules for hard forks may be missing in most crypto tax codes given the novelty they present to tax authorities.
4. Are you taxed on hard forks in Singapore?
In Singapore, the moment you receive new coins following a hard fork is not a taxable event. However, when you dispose of those coins with gains, you will have to pay income tax.
5. Forks and Airdrops may show distinct tax treatment
In some crypto tax codes, the word “airdrop” is mentioned in regards to hard forks.
However, please be aware that more developed tax codes (e.g., UK) may separate the tax treatment of hard forks and airdrops, which requires you to be aware of other factors. In the short future, we’ll be exploring more about the impact of airdrops on your taxes.
Hard forks reward holders with new crypto, however, as we’ve seen, you have to be aware of the details in your country when it comes to its tax treatment.
Bonus: Keeping Consistent and updated records
A common thread across countries is the obligation of keeping records of every transaction while maintaining consistent methods in the appraisal of the basis costs and gains.
Depending on your country-specific obligations and your level of trading, this can prove challenging. If you need help automatising all your tax reporting, sign up for an account with CoinTracking.
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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service. CT Full Service is provided by a team of crypto tax professionals led by Sharon Yip, an expert CPA. Follow our weekly AMAs on Twitter where Sharon Yip answers your crypto tax questions.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.