A Fork in the Blockchain: Income Tax and the Bitcoin/Bitcoin Cash Hard Fork

May 7, 2018

On August 1, 2017, the Bitcoin blockchain experienced a hard fork. The hard fork, spurred by concerns over Bitcoin’s scalability, resulted in an entirely new blockchain and an accompanying new cryptocurrency: Bitcoin Cash. However, the new blockchain relies on the history of transactions recorded on the old blockchain. Consequently, at the time of the hard fork, every holder of Bitcoin could have received an equal amount of Bitcoin Cash. This sudden receipt of Bitcoin Cash poses a variety of tax problems. Should the acquired cryptocurrency qualify as income? If so, how should taxpayers calculate this income? Current income taxation law suggests the Bitcoin/Bitcoin Cash hard fork produced gain that, for the most part, was immediately realized. Thus, most taxpayers that received Bitcoin Cash at the time of the hard fork should have reported its value as income to the Internal Revenue Service. However, due to a variety of practical concerns, including a lack of sufficient analogous situations, cryptocurrency’s volatility, and the IRS’s refusal to follow relevant regulations related to the taxation of “treasure trove,” perhaps it would be best to reconsider this conclusion and explore a solution that permits taxation of Bitcoin Cash upon a subsequent sale.