Are hard forks taxable?

A hard fork is taxable in the US only when it leaves you holding new coins that you control. The IRS treats those coins as ordinary income, valued at fair market value when you gain control, and that value becomes your cost basis. A fork that creates a new chain without giving you any coins is not income. How forks work technically is covered in hard fork vs soft fork.

Is a hard fork taxable under Rev. Rul. 2019-24?

Revenue Ruling 2019-24 is the IRS's main hard fork guidance. It describes two cases:

1. No coins received. A fork creates a new coin, but none is sent to the holder. The IRS says there is no income, because nothing new was received.
2. Coins airdropped. The holder receives units of the new coin and can dispose of them right away. The IRS says this is ordinary income in the year received, equal to their fair market value when recorded on the blockchain.

The ruling defines an airdrop as a distribution of coins to many addresses, and notes that not every hard fork includes one. The IRS FAQ repeats both outcomes.

When is hard fork income counted?

The key test is dominion and control, meaning you can sell, swap or transfer the coins. The ruling says that if coins land in an exchange wallet that does not support them, you have no income at that point. You are treated as receiving them when you later gain the ability to dispose of them.

The IRS applied this to the Bitcoin Cash split in Chief Counsel Advice 202114020. Someone who held bitcoin with their own keys had income at the fork on August 1, 2017. An exchange customer whose platform only enabled Bitcoin Cash on January 1, 2018 had income in 2018 instead, at that day's value. The advice is not binding precedent, but it shows how the IRS reads the ruling.

Do protocol upgrades or soft forks create income?

The IRS FAQ says soft forks generally do not create income, since no new coin results. In Chief Counsel Advice 202316008, the IRS also concluded that changing a blockchain from proof of work to proof of stake creates no income or gain when existing coins carry on unchanged, according to The Tax Adviser. The memo does not name a specific blockchain. Background is in proof of work vs proof of stake.

How do you report hard fork income?

The IRS says fork income goes on Schedule 1 of Form 1040, and receiving coins from a hard fork means answering Yes to the digital asset question. Your basis in the new coins equals the income you reported. Selling them later gives a capital gain or loss, measured from that basis. Airdrops that are not linked to forks are covered in are crypto airdrops taxable.

Rules differ by country and change often. Check the tax authority or a qualified professional for your own situation.