The Internal Revenue Service has clarified the tax consequences of a “hard fork” of a cryptocurrency.
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A hard fork occurs when a change to a cryptocurrency’s protocol results in the creation of a new cryptocurrency on a new distributed ledger.
“A taxpayer does not have gross income under § 61 as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency,” the IRS said. “A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.”
An “airdrop” is the way of distributing the digital currency that was created as a result of the hard fork. The IRS says a taxpayers basis for property that is not purchased is determined by the “fair market value of the property when the property is received.”
Earlier this year, the IRS sent letters to 10,000 U.S. taxpayers who had engaged in cryptocurrency transactions, reminding them that they need to report income and pay taxes.
Under current U.S. tax laws, cryptocurrencies are treated like property.
Taxpayers who fail to pay taxes on their cryptocurrency transactions can be subject to penalties and interest, and in more serious cases even criminal prosecution.
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Brittany De Lea contributed to this report.
