Forking Belief in Cryptocurrency A Tax Non-Realization Event

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David G. Chamberlain


When the community of believers in a cryptocurrency splits into two, the currency may experience a “hard fork” and split into two independent currencies. Indeed, like fiat currencies, cryptocurrencies only have value if people believe they have value and are willing to use them in transactions. Hard forks do not create new value unless they inspire new belief; otherwise, they merely split the value of the original currency between the two new currencies. The Internal Revenue Service is wrong to conclude in Revenue Ruling 2019–24 that the value of the new currency resulting from a hard fork constitutes gross income in
the hands of coin owners. A hard fork is properly understood as a division of each coin of the original currency into two resulting coins and is no more a taxable event than when a property owner subdivides a larger parcel of land into two smaller lots. The appropriate question is not whether there is income, but how the owner’s basis in the original property should be split between the two resulting parts. After delving into the nature of hard forks and exploring the governing law, the author suggests an approach for basis allocation.

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