Some cryptoassets operate by consensus amongst that cryptoasset’s community. When a significant part of the community want to do something different they may create a ‘fork’ in the blockchain. There are two types of forks, a soft fork and a hard fork.
A soft fork updates the protocol and is intended to be adopted by all. No new tokens, or distributed ledger, are expected to be created and there is no impact on the tax position.
A hard fork is different and can result in new tokens coming into existence. Before the fork occurs there is a single distributed ledger. Usually, at the point of the hard fork, a second branch (and therefore a new cryptoasset) is created. The distributed ledger for the original and the new cryptoassets have a shared history up to the fork.
If an individual held tokens of the cryptoasset on the original distributed ledger they will, usually, hold an equal number of tokens on both distributed ledgers after the fork.
The value of the new tokens is derived from the original tokens already held by the individual. After the fork, the new tokens will need to go into their own pool. Any allowable costs for pooling of the original tokens are split between the two pools for the:
original tokens; and
If an individual holds their tokens through an exchange, the exchange will make a choice whether to recognise the new tokens created by the fork.
Costs must be split on a just and reasonable basis. HMRC does not prescribe any particular apportionment method. It is standard practice (based on the treatment of shares, because cryptoassets use the same rules) that the cost of the original cryptoasset is apportioned between the old and new tokens, pro-rata in line with the respective market values of each token the day after the hard fork.
The new tokens can only be disposed of if the exchange recognises the new tokens. If the exchange chooses not to recognise the new tokens then the individual may seek to apportion all of the allowable costs to the original tokens (however HMRC may consider if this is just and reasonable in the circumstances). The individual may instead apportion the costs but seek to make a negligible value claim in respect of the new tokens (providing that the conditions for making a negligible value claim have all been satisfied).
HMRC has the power to enquire into an apportionment method that it believes is not just and reasonable. Therefore whichever method an individual chooses to use, they should keep a record of this and be consistent throughout their tax returns.