Bitcoin Forks and Livestock Law? Tax Day 2018 Is a Different Animal

U.S. income tax treatment of forks is unclear. A conservative approach would be to treat the receipt of new cryptocurrency as taxable ordinary income.

AccessTimeIconApr 8, 2018 at 10:01 p.m. UTC
Updated Sep 13, 2021 at 7:47 a.m. UTC

Stevie D. Conlon is a vice president and tax and regulatory counsel; Anna Vayser is a product manager and Robert Schwaba is a senior tax and regulatory specialist with Wolters Kluwer. They acknowledge the contributions of colleagues John Kareken and Cynthia Lapins.

The following article, an exclusive contribution to CoinDesk's Crypto and Taxes 2018 series, is adapted from “Taxation of Bitcoin, Its Progeny, and Related Derivatives: Ex Coin Machina,” published in Tax Notes, February 19, 2018.


If the great bitcoin forks of 2017 entitled existing bitcoin holders to “free money,” as was often said, do Americans have to pay tax on that windfall, and how much?

This is a particularly timely question due to recent volatility in cryptocurrency values and the approaching April 17 U.S. deadline to file tax returns. Unfortunately, there is no guidance from the IRS or existing law specifically addressing the matter.

However, current tax law should be considered. On a fork, the new cryptocurrency received (such as bitcoin cash, which split off from the main bitcoin network in August, or bitcoin gold, created in November) is not identical to the cryptocurrency already held.

Generally, the definition of taxable income under U.S. tax law is broad and exceptions are few. For example, found property is generally taxable to the finder per IRS regulations, rulings and court cases.

Although tax law excludes gifts from the recipient’s income, it can be difficult to prove that a transfer is a gift and the exclusion is narrow. Similarly, prizes and awards are taxable income.

And tax law providing tax-free treatment for stock splits and other corporate reorganizations is either generally limited to receipt of the same (not similar) stock or has other requirements that narrow eligibility.

As a result, one might conclude that a fork causing the receipt of a new cryptocurrency of determinable value could trigger taxable income.

A different animal

Although new cryptocurrency received in a fork differs from that already held, could it be analogous to the taxation of pregnant livestock?

In a 1986 revenue ruling and a 1977 Tax Court case the IRS addressed the tax consequences of the birth of a calf and a foal, respectively. In each case, the purchaser acquired the pregnant cow or mare knowing it was pregnant. The value of the unborn calf or foal was determinable at the time of acquisition (not at birth) and was used to allocate a portion of the purchase price upon birth of the offspring (with no tax being paid at that time).

Could these authorities support similarly treating the receipt of cryptocurrency in a fork as nontaxable?

If this approach were applied to new cryptocurrency acquired in a fork, would it only apply to holders who had knowledge of the pending “birth” of the new cryptocurrency at time of acquisition (as was the case in the ruling and court case discussed above)?

And would basis allocations be made by reference to valuations at time of acquisition (rather than at time of the fork)?

In absence of clear guidance, treating the receipt as taxable would seem to be the conservative approach, while treating it as tax-free could be risky, with potential tax, interest and penalty consequences.

Timing of income

Even if the gain is taxable, timing presents a related question.

There has been and could be delayed access to the new cryptocurrency depending on the exchange or other manner by which a specific holder owns her cryptocurrency. Values differ from day to day. Which value should be used for determining the amount of taxable income?

Under tax rules treating found property as income, the timing of income depends on when the finder has dominion and control. Applying this rule to forks, some holders might be entitled to access (and considered as having dominion and control of) the new cryptocurrency received earlier than other holders.

Does timing of income recognition (if taxable) differ? Does timing of income require taking control, such as transferring or selling the new cryptocurrency? Or does it occur earlier, such as when the holder has the right to do so, or has awareness of control—such as upon reviewing an account statement?

The taxable amount

If timing of income recognition differs from holder to holder, does the amount of taxable income differ based on the date when income is recognized?

Market values of either the existing or newly received cryptocurrency typically change after the date of a fork. If the new cryptocurrency received is taxable, it logically follows that the recipient’s tax cost basis should equal the amount of income or gain recognized, and the holding period should start the next day. The basis in the existing cryptocurrency should be unaffected.

Another consideration if a fork results in taxable income is the income’s character as ordinary income or capital gain. Different tax character results in different tax rates, rules and permitted items that can offset such income or capital gains. Capital gains and losses require a sale or exchange seemingly absent in the context of a fork, so presumably any income recognized would be ordinary income.

Even if receipt of new cryptocurrency is nontaxable, the recipient’s tax basis in the new cryptocurrency must be determined. The new basis could be zero, in which case any subsequent gain would be taxable.

Otherwise, the basis would need to be allocated between the cryptocurrency held before and after the fork, leading to questions of how to determine basis allocation and the tax law justification.

American Bar and IRS

The American Bar Association's Tax Section submitted a report to the IRS dated March 19 that discusses these issues. The ABA report recommended a temporary solution in part treating the 2017 forks as taxable events but with a deemed value of zero. This proposal may not fly given the reported values of the new coins at the time of the forks.

And on March 23, the IRS reminded taxpayers to report virtual currency transactions on their tax returns and warned of the tax liability, interest and penalty costs of failing to do so.


The U.S. income tax treatment of forks is unclear. However, there is a risk that the receipt of the new cryptocurrency could be taxable as ordinary income to the recipient, and it seems that a conservative approach would be to treat it this way.

There are also concerns regarding the timing and amount of income. Holders of cryptocurrency should consider these issues and discuss them with their tax advisors due to tax liability, interest and penalty risks.

Telephone image via Shutterstock.


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