How are Cryptocurrency Hard Forks Taxed?

Cryptocurrency forks

A cryptocurrency hard fork is a permanent divergence from the previous version of the blockchain. While soft forks maintain compatibility between the two chains, hard forks create chains that are incompatible with one another. Anyone that held coins before and during the fork will have coins on both chains after the hard fork occurs. This can have a significant impact on your taxes.

With this "fork" in the blockchain, one path follows the new, upgraded blockchain, and the other path continues along the old path. Generally, after a short period of time, those on the old chain will realize that their version of the blockchain is outdated or irrelevant and quickly upgrade to the latest version.

An example:

The bitcoin cash hardfork provided one "free" bitcoin cash coin for each bitcoin that you held, as long as you were using a reliable wallet or exchange. If you held 3 bitcoin prior to the hard fork, you received 3 bitcoin cash on August 1, 2017.

Why do forks happen?

Correct security risks - Blockchain software may have inherent security vulnerabilities that need to be fixed before a hacker takes advantage of them. In these cases, a hard fork may be required to protect the larger ecosystem.

Add new functionality - Cryptocurrency maintainers may want to add new functionality that's not possible without a hard fork. For example, Ethereum's Byzantium hard fork was a mandatory upgrade to improve privacy and scalability.

Reverse previous transactions - A hard fork can be used to roll back previous transactions on a blockchain. This was seen in the case with the hard fork to reverse the hack on the DAO (decentralized autonomous organization) on the Ethereum blockchain.

How does the IRS tax cryptocurrency forks?

The IRS addressed cryptocurrency hard fork taxation in Revenue Ruling 2019-24, issued in October 2019.

If a certain cryptocurrency that you are holding goes through a hard fork which "occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger", the new forked cryptocurrency that you receive is taxed as income. Your cost basis in the newly received cryptocurrency becomes the income you recognized.

For example - If you held 2.5 Bitcoin in July of 2017, and received 2.5 Bitcoin Cash as a result of the bitcoin cash hard fork, you recognize this received 2.5 Bitcoin Cash as income at the fair market value of the bitcoin cash at the time it was received. If Bitcoin Cash was trading for $500 a piece that day, you would recognize ordinary income of $1,250 ($500 * 2.5). Your cost basis in this Bitcoin Cash becomes $1,250.

If you do not receive new cryptocurrencies after a hard fork, you will not have any taxable income.

Dominion and control. The IRS specifies that you only recognize income when you have dominion and control over the newly received tokens, meaning you can transfer, sell, exchange, or otherwise dispose of them. If your exchange does not support the forked coin and you cannot access the tokens, you may not owe tax until you can.

Cryptocurrency soft forks

A cryptocurrency soft fork "does not result in the creation of a new cryptocurrency, meaning it does not result in any income." So if your cryptocurrency goes through a protocol change that does not create a new cryptocurrency, you don't recognize any income.

How to report hard fork income on your taxes

Hard fork income goes on your federal tax return in the year you receive the forked tokens. Here's how to report it:

1. Report the fork as ordinary income. Include the fair market value of the tokens at the time of receipt on Schedule 1 (Additional Income) of your Form 1040.
2. Record your cost basis. The amount you recognized as income becomes your cost basis for the forked tokens.
3. Report any future sale on Form 8949. When you later sell or trade the forked tokens, calculate your capital gain or loss using your cost basis and report it on Form 8949 and Schedule D.

Remember, as of January 1, 2025, crypto brokers are required to issue Form 1099-DA for digital asset transactions. That means the IRS now has direct visibility into your holdings and disposals. If you receive a Form 1099-DA that includes proceeds from forked assets you later sold, you'll want your income-at-fork records to reconcile.

Cryptocurrency airdrops

If you receive cryptocurrency from an airdrop ("a distribution of cryptocurrency to multiple taxpayers' distributed ledger addresses") you recognize income on the day it was received. The amount of income recognized should be determined using the fair market value of the cryptocurrency at the time.

If you did not receive any cryptocurrency when an airdrop event occurred, you do not recognize income as you did not receive the property.

Cryptocurrency tax software

You can use cryptocurrency tax software like CoinLedger to automatically account for all of your hard forks and airdrops in accordance with IRS guidance.

Simply import all of your cryptocurrency trades and transactions into the platform. You can add any cryptocurrency received from an airdrop or hard fork and tag these transactions as either a "Fork" or "Airdrop" event. Every transaction will be assigned the appropriate cost basis and fair market value in USD at the time of receipt, allowing you to generate your necessary tax documents with the click of a button. Using CoinLedger's integration with TurboTax, you can even import your reports right into TurboTax for easy filing.

You can get started for free with CoinLedger and see how easy it makes your crypto tax reporting.