So if I sell my newfound BCH today, which was birthed from thin air a few months ago, but originates from BTC I bought years ago, is it short term capital gains or long term?
What if you had no interest in BCH but you owned 1,000 BTC. Do you suddenly have a $277,000 income tax bill?
Yes, as discussed by Tyson Cross, tax attorney at BitcoinTaxSolutions.com. Since you have accession to wealth then this is taxable income.
Also these forks often collapse, so when was the income gain? The same day? You'd have people owing more tax than their entire net worth. (Forks often pump in the first day/week then drop to nothing.)
If this is possible then you could attack every Bitcoin holder by making millions of forks each day and making lots of trades to give each fork real value. If you don't declare each fork you end up getting penalties.
I would imagine a more sane way to deal with this is like how the ATO deals with Bitcoin mining. You mine Bitcoin but it's not realized until transferred to a third party.
I would argue the same for forks.
A fork is made, you have coins. But it's not like you received those coins. Technically you always had them as they are old coins just now on a different chain. If you sell the coins then it's a gain that you owe tax on.
But forcing each user to track every fork as income is impractical and not viable. You'll see more of this as thousands of forks come into existence over the coming years.
This is something I would actually look into getting a private ruling about.
EDIT: IANAL, IANAA, etc...
Surprise, tax law isn't fair. Surprise, nobody is looking to change that.
As another counterfactual: What if the SegWit2x fork had happened, and each of the two resulting cryptocurrencies had roughly equal market cap and each claimed to be the "true" Bitcoin? I don't see how the IRS could coherently distinguish between these two cryptocurrencies and treat the sale of one as a long-term gain but a sale of the other as a short-term gain.
It's trivial to distinguish between the two. One has existed for several years and the other came into existence in 2017. One goes by the name Bitcoin or Bitcoin Classic, and the other by the name Bitcoin Cash. Legally and for tax purposes, the technical underpinning of the currencies is irrelevant...
The sale of Bitcoin Classic could be long-term gain because it could be held for >1 year (the threshold for LTG). The sale of Bitcoin Cash is short-term gain (for the 2017 tax year) because it came into existence in 2017.
Note that Bitcoin Cash should not be treated as a stock split for capital gain purposes--generally you would not get to share the basis of your Bitcoin Classic holdings with your Bitcoin Cash holdings. You can do that with stock because tax-rules specifically provide this option for stock and equity ownership interests. Bitcoins aren't equity ownership interests, they're assets. If you acquired Bitcoin Cash through the fork, you received free assets, and you're taxed on it as if you received free money.
My comment about distinguishing was not about Bitcoin Cash, but about the following counterfactual:
>What if the SegWit2x fork had happened, and each of the two resulting cryptocurrencies had roughly equal market cap and each claimed to be the "true" Bitcoin?
In this hypothetical situation, there is (by assumption) real disagreement about which of the two cryptocurrencies is the "real" Bitcoin, and I don't see how the IRS would be equipped to decide this contentious issue. And if it doesn't make such a decision, then the only remaining possibility is to treat the two chains equally.
If/when you later sell it, you will be taxed again on any gain in the value of the BCH at the time of sale as capital gain (but only on the gain, not the total value of the BCH). Alternatively, if the value has dropped, you will get a capital loss deduction. Whether it is short-term or long-term capital gains/losses depends on how long you've held the BCH at the time of sale.
And yes, this is the consensus of the experts...especially the ones at the IRS...
Why is that? Another way of looking at it is that the value of your existing bitcoin holdings got split between two competing chains. In a rational market, value of your bitcoin holdings pre-fork should be equal to the sum of the value of your holdings on the two post-fork chains.
And let's not describe Bitcoin as a rational market...Even if that were true, it's not relevant to the tax treatment.
Bitcoin Cash is not something that existed inside Bitcoin and was then spun out. It's more like a new company was formed and it's cap table was initialized as a copy of another pre-existing company.
I think there just isn't any precedent for the concept of "forking" and how the internal revenue code applies to it.
The only problem is that there is no entity that can issue a notice on how to assign the basis, which is how things are usually handled in equities. The price of BCH was all over the place immediately after the fork, though for a while the price of BTC+BCH was closer to the old price of BTC than BTC alone was, which is what you’d expect.
See this post for an example of a duplicated cap table in an equity market.
https://money.stackexchange.com/questions/23176/in-the-event...
The cap table is interesting though. One could say it starts off at $0 but that isn't really true as there is a 'good will' value due to the public knowledge of the fork and that the coin will be worth something.
BCH received in the split would be treated as free money received (because Bitcoins are currency, not equity interest), so as cash income, and thus would be taxed like cash income.
It would be income tax then, right?
If the coin crashes to 0 a week later, then you'd still pay it too, in theory.
The following are my observations from discussions with my accountant and reading some of the IRS tax codes and "guidance". Do NOT take this as tax advice
In general (within the US) the tax code is treating crypto both as property AND as income.
1) Someone pays you in crypto - income
2) If you mine crypto it is treated as income.
3) If you purchase crypto it is treated as property.
4) If you HOLD crypto it is treated as property.
To break down how this works in regards to taxes. If it is "income crypto" then you are liable for taxes on the value of the crypto at the "moment" you receive it.
1) For example, you received 1 token that is valued at $100 and your tax rate is 22% then you now owe $22 in income tax. If you hold that crypto and it goes to $0; you still owe $22 in income tax.
To further complicate this though, the loss from the $100 to $0 IS a capital loss. So what this means it you made an extra $100 in income, but then you lost $100 in capital losses which you write down against your income so now you are back to owe-ing $0 in income tax on that $100.
Now that may seem like a complicated way of saying you don't owe anything, but the catch is you can only write down $3000 a year of capital losses against your income. You can carry those losses over each year until it is wholly accounted for, but in the meantime, you could end up holding the bag and oweing a lot of money to the IRS.
2) If instead, you purchase 1 token that is valued at $100 and you hold it and it goes to $200 and then sell; you now owe capital gains taxes. If you held for less than 1 year then the $100 gain is classified as capital gains, but taxed like income. If you hold it for more than 1 year it is taxed at the capital gains rates.
On the other hand, when you sell the BCH, your basis will the FMV when received, so you would only be taxed the second time on the gain in price (if any).l