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Recap HomeIRS Virtual CurrenciesUK Tax GuideSA Tax Guide
  • Cryptocurrency Tax Guide for US Individuals
    • Virtual Currency & Cryptocurrency
    • Who are Recap?
  • CRYPTOCURRENCY TAX
    • Do I Need to Pay Tax on my Crypto?
    • Which Taxes Apply?
      • Capital Gains Tax (CGT)
      • Income Tax
      • Non-Taxable Transactions
    • How Much Tax Will I Pay?
    • Capital Gains Tax
      • Calculating the Capital Gains and Losses
      • Cost Basis Methods
      • Disposal proceeds
        • Non Taxable Events
        • Taxable Events
        • Donating cryptocurrency to a charitable organization
        • Gifting cryptocurrency to another person
    • Income Tax
      • Receiving cryptocurrency from mining
      • Receiving cryptocurrency rewards
      • Forks
      • Airdrops
      • Tax on Tokenswaps and Mainnetswaps
    • Deductibles and Reducing Capital Gains
  • TRANSACTION TYPES
    • 💷Selling Crypto for Fiat
    • 🛍️Purchases using Crypto
    • 🔄Exchanging one crypto for a different crypto
    • 🎗️Donations to Qualified Charities
    • 🎁Gifts
    • 🎈Airdrops
    • 🤝Staking
    • 💸Transfers
    • 🍴Forks
    • ⛏️Mining
    • 👛Employment income
    • 🚨Lost & Stolen Crypto
    • 💧Liquidity Pools
    • 🔮Cryptoasset derivatives (CFDs, Futures and Margin Trading)
    • 💼Crypto Loans
    • 💎Lending Rewards
    • 🪞Reflections Rewards
    • 👥Referral Income
    • 💳Cashback
    • 🎨NFTs (Non Fungible Tokens)
    • 🎮Play-to-earn gaming NFTs
  • Record Keeping
  • Reporting Income and Gains to the IRS and Paying the Tax
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  • Soft fork
  • Hard fork

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  1. CRYPTOCURRENCY TAX
  2. Income Tax

Forks

Some cryptocurrencies operate by consensus amongst that cryptocurrency’s community. When a significant portion of the community want to do something different, they may create a ‘fork’ in the blockchain or change the protocol within that blockchain to accept or reject future transactions.

There are two types of forks: a soft fork and a hard fork. The blockchain for the original and the new cryptocurrencies have a shared history up to the fork. If an individual held tokens of the cryptocurrency on the original blockchain they will, usually, hold an equal number of that cryptocurrency on both blockchains after the fork.

Soft fork

A soft fork updates the protocol and is intended to be adopted by all. During a soft fork, no new cryptocurrencies are created from the fork to go to a holder, as such the soft fork is not a taxable event.

Hard fork

A hard fork, however, can result in a new protocol that creates new cryptocurrencies. An example of a hard fork is when Bitcoin Cash (BCH) was created in 2017. This split in the Bitcoin blockchain, which allowed for a larger block size would not allow all future blocks to add to its blockchain. As such, when Bitcoin Cash went live, a new token (BCH) was created and anyone holding original Bitcoin (BTC) also received BCH tokens for the new fork.

In this example, under current IRS guidance the IRS would consider the BCH tokens received at the time of that fork, or any other cryptocurrencies received as a result of a hard fork to be taxable income equal to the fair market value of the token when it was received.

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Last updated 3 years ago

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