To calculate your income from cryptocurrency received following a hard fork, you need to determine the fair market value (FMV) of the new cryptocurrency at the time you receive it, provided you have dominion and control over it. Here are the steps to follow:
- Determine the Date and Time of Receipt: You receive the new cryptocurrency when the transaction is recorded on the distributed ledger, and you have the ability to transfer, sell, exchange, or otherwise dispose of it. This is the point at which you have dominion and control over the cryptocurrency.
- Establish Fair Market Value: The FMV of the new cryptocurrency is determined at the date and time you receive it. You can use any reasonable method to determine the FMV, such as the publicly published price value at a cryptocurrency exchange or cryptocurrency data aggregator.
- Calculate Ordinary Income: The amount of ordinary income you must include in your gross income is equal to the FMV of the new cryptocurrency at the time of receipt.
Example Calculation
Assume you held 1 unit of Bitcoin, and on August 1, 2017, a hard fork occurred, resulting in the creation of Bitcoin Cash (BCH). Here’s how you would calculate your income:
- Date and Time of Receipt: If you had control over the BCH immediately following the hard fork, the date and time of receipt would be August 1, 2017, at 9:16 a.m., EDT.
- Fair Market Value: Determine the FMV of BCH at that specific time. For instance, if the FMV of 1 unit of BCH was $380.01 at the time of the hard fork, this is the value you would use.
- Ordinary Income: You would include $380.01 as ordinary income in your gross income for the 2017 tax year.
Special Considerations
- Hosted Wallets: If your cryptocurrency is held in a hosted wallet by an exchange that does not support the new cryptocurrency immediately, you do not have dominion and control over the new cryptocurrency until the exchange supports it. For example, if the exchange began supporting BCH on January 1, 2018, you would use the FMV of BCH on that date to calculate your income.
- Basis in Cryptocurrency: Your basis in the new cryptocurrency is equal to the amount you included in income. For example, if you included $380.01 in income, your basis in the BCH would be $380.01.
Legal References
- Section 61 of the Internal Revenue Code: Gross income includes all income from whatever source derived, including gains from dealings in property.
- Rev. Rul. 2019-24: Provides that a taxpayer has gross income as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of the new cryptocurrency.
- Treas. Reg. § 1.451-2: Addresses the timing of income inclusion for taxpayers using the cash method of accounting.
By following these steps and considering the specific circumstances of your receipt of the new cryptocurrency, you can accurately calculate the income to report on your tax return.
Sources:
Rev. Rul. 2019-24
Notice 2014-21
Publication 544 (2023)
CCA 202114020
Consequences of Hard Forks, Soft Forks, and Airdrops
