What is a Fork?
There are two types of forks: hard and soft. A hard fork is when a cryptocurrency splits into 2+ branches because the existing code for the coin is changed. This results in the original version and a new version (or versions) of the coin. An example is Bitcoin and Bitcoin Cash. With a soft fork, the code for the coin is getting changed but it is backward compatible with older versions so it is more like an update resulting in one updated blockchain (rather than 2+ blockchains).
What is an Airdrop?
Airdrops are free coins that are sent to your wallet. These are generally done as a marketing/publicity move by coins to increase awareness of their token and you may not even know that this has happened (until you check your CoinTracker account!).
U.S. Tax implications
The IRS has left some grey area on how these assets should be taxed. In October 2019, they released a set of FAQs on cryptocurrency taxes including:
Q22. One of my cryptocurrencies went through a hard fork followed by an airdrop and I received new cryptocurrency. Do I have income?
A22. If a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you receive that cryptocurrency.
This seems to indicate that forked coins should be treated as income, with the fair market value at the time of receipt being income and also the basis for the coin as you go forward until you dispose of the forked coin.
There is no guidance on airdrops. That said, the most conservative approach seems to be following well-established “treasure trove” doctrine where the IRS has long held that “found” money is a taxable event, similar to forked coins.
So for example if you own one bitcoin (BTC) and it forks into one bitcoin (BTC) and one bitcoin cash (BCH), then the one BCH you receive needs to be reported as taxable ordinary income (not a capital gain). This is true whether or not you sell your BCH. In addition, the amount you use for your reported income becomes your basis for the new BCH, and what you will use to calculate capital gains when you sell your BCH. The same logic applies if you were airdropped a new token.
There is also some debate as to the exact method for calculating the fair market value for the BCH. For example there could be a time delay between when the fork occurs and when you gain control of the forked coin depending on whether you are using a local wallet or an exchange wallet. One simple, straightforward approach is taking the price at the time the forked coin (BCH) becomes available to you in your wallet (whether on an exchange or a local wallet) as the price for basis and taxable income. Note that some argue that the cost basis should be zero for forked coins and all upside should be considered capital gains, though this is a more aggressive approach. If you are unsure what to to here, please consult your tax professional.
For India tax information, please see our blog post: Guide to India Cryptocurrency and Bitcoin Taxes (AY 2023-24 Edition).
How do I tag my transactions as Forks or Airdrops?
CoinTracker allows you to tag any received coins in the transactions page as an Airdrop , Fork as well as various other tags so you can review your income for a given year in the tax center, in addition to the capital gains which are already tracked.
You can tag a transaction as a Fork or Airdrop in CoinTracker by filtering the the specific transaction through the transactions page, selecting the More actions option, followed by Tag transaction and finally either the Airdrop or Fork tag.
Feel free to review our guide on how to tag and edit transaction for more information.
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