How Are Crypto Forks Taxed?

Both soft and hard forks happen occasionally in the crypto community for a variety of reasons. Not only do they create volatility for your investments, but they may also increase your tax bill. Learn more about forks and how they’re taxed.

Cryptocurrency forks

A fork occurs whenever there is a change to the current status quo of a specific blockchain. There are two kinds of forks you need to know about: soft and hard forks.

Soft forks

The easiest way to understand a soft fork vs. a hard fork is to think of them as backward compatible or non-backward compatible, like game consoles and older games.

A soft fork is akin to a software upgrade for that specific blockchain. It becomes a new way of doing things and brings new functionality to the blockchain. The blockchain itself doesn’t split because users agree on the new changes. When the change happens, the blockchain carries on chronologically from the same chain.

Hard forks

A hard fork is similar in that it is an upgrade. However, the changes are so fundamental (or all users cannot agree on the changes) that the blockchain cannot continue on from the previous chain. In these instances, the blockchain splits into two - the original and an updated version that implements the given change. The latter creates an entirely new cryptocurrency.

There are many popular cryptocurrencies that have been created as a result of a hard fork, including Bitcoin Cash and Bitcoin Gold.

Why do forks happen?

The most common reason a fork happens is to add new functionality or upgrade security, like when Ethereum switched from proof of work to proof of stake.

Hard forks tend to happen as a result of a disagreement over a given cryptocurrency's future. If the community can’t agree on what should happen or what changes should be made to address existing issues, often the easiest way to resolve this disagreement is for the blockchain to split.

What is the impact of a fork?

Forks can be good or bad news for crypto investors.

Soft forks, when managed well and implemented at a steady pace, can add new functionality and new investment opportunities for investors. A good example of this is the steady rollout of Ethereum 2.0. The changes are discussed among the community, a majority consensus is found, and a roadmap of changes is developed and implemented.

Hard forks tend to create more volatility, which can be difficult to imagine in an already volatile market. An example of this is Bitcoin Cash, which came as a result of a disagreement over updates for the Bitcoin blockchain. Some users wanted to increase the block size to allow blocks to be processed faster by miners, but others did not. So the blockchain split into Bitcoin and Bitcoin Cash.

Any investors who held Bitcoin at the time of the split automatically received the same amount of Bitcoin Cash on the new blockchain. Both Bitcoin and Bitcoin Cash’s prices soared up and down as investors tried to guess which would come out on top.

How are forks taxed?

The way forks are taxed depends on the type of fork and the tax office guidance.

With soft forks, no new asset is created, so there is no taxable event. With hard forks, a new asset is created, so a taxable event may occur, but it all depends on your tax office's rules.

How does the IRS tax forks?

The IRS has clarified that any new coins received as a result of a hard fork should be treated as income and subject to Income Tax. You can calculate the amount of income by identifying the fair market value (FMV) of the coin on the day you receive it. You’ll need to report this as “other income” on IRS Form 1040.

As well as Income Tax on receipt, if you later sell, swap, or spend your asset, any profit you make will be subject to Capital Gains Tax. Your cost basis for coins from a fork will be the fair market value on the day you receive them, like above. You’ll need to report this on IRS Form 8949.

You can find more information on how cryptocurrency is taxed in the US in our US Crypto Tax Guide.

How does HMRC tax forks?

HMRC doesn't view coins received as a result of hard forks as income, so they’re not subject to Income Tax.

They will, however, be subject to Capital Gains Tax when you sell, swap, spend, or gift them (excluding to your spouse). Only any profit made from this transaction will be subject to Capital Gains Tax.

To figure out your profit, you simply subtract your cost basis (how much it cost you to acquire the coins plus any fees) from the value of the coin at the point you disposed of it. Your cost basis for any coins from a fork is derived from your existing tokens from the previous blockchain, not the FMV of the new coin on the day you received it.

You can find more information on how cryptocurrency is taxed in the UK in our UK Crypto Tax Guide.

How does the ATO tax forks?

The ATO has two rules for hard forks, and it depends on whether you’re an investor or running a cryptocurrency business.

If it’s the latter, you’ll need to follow trading stock tax rules, not crypto tax rules.

If you’re an investor, you won’t pay Income Tax on any new coins received as a result of a hard fork. You’ll only pay Capital Gains Tax when you dispose of them.

The ATO is also very clear that the cost basis for new coins from a hard fork is zero, so you’ll pay Capital Gains Tax on the total value of your coin as it’s all seen as profit. For example, you received 1 BCH in 2017 when it split from BTC. Your cost basis for this new coin is $0. You sell it a couple of months later at its peak for $2,000. Because your cost basis is zero, the whole $2,000 is viewed as profit by the ATO and is subject to Capital Gains Tax.

You can find more information on how cryptocurrency is taxed in Australia in our Australian Crypto Tax Guide.

How does the CRA tax forks?

Unlike the tax offices above, the CRA hasn’t issued specific guidance on how hard forks are taxed, so it's unclear whether coins received as a result of a hard fork would be classed as income.

What is important to note is that because Canada uses the adjusted cost basis method, the cost basis for any new coins received as a result of a fork would be zero, as you didn’t pay anything for them. This means when you later dispose of this asset, you’d pay Capital Gains Tax on the total value of your coin, as it’s all considered profit.

This said, when you pay tax on capital gains in Canada, you’ll only pay tax on half of your net capital gains. So, you’ll essentially only pay tax on 50% of any disposed assets received from a hard fork.

You can find more information on how cryptocurrency is taxed in Canada in our Canada Crypto Tax Guide.

Calculate your taxes with Koinly

It can be difficult to calculate taxes on crypto forks, but crypto tax software like Koinly can help.

All you need to do is import your transactions from the various crypto wallets and exchanges you use into Koinly. You can do this via a CSV file or through API integration for most wallets. Once your data is imported, it should automatically tag different transactions - including forks. However, if your data is missing this information, you can easily tag individual transactions in Koinly. Just find the transaction in our platform and use the three dots on the right-hand side to tag it as a fork.

For users in countries where coins, as a result of a hard fork, are considered income, you can also head into settings to turn the “treat forks as income” option on.

Once your transactions are tagged and your settings are correct for your location, Koinly will calculate your crypto taxes, including any capital gains from forks and any income from forks. You can find an easy-to-read summary on the tax reports page, as well as specific tax reports to download and use when it’s time to file your taxes.