International Business Articles
By Benjamin Kirschbaum, Esq.
WINHELLER Attorneys at Law & Tax Advisors
More often, so-called hard forks occur in the cycle of a cryptocurrency. The first cryptocurrency that completed a hard fork was the Ethereum blockchain. In the course of the so-called DAO hack in 2016, Ethereum was split into Ether (ETH) and Ether Classic (ETC). In 2017, Bitcoin followed with even two forks: Bitcoin Cash (BCH) and Bitcoin Gold (BTG). However, it is still largely unclear how these operations will have to be treated under tax law.
What is a Hard Fork?
In case of a fork, the blockchain – i.e. the open accounting system underpinning cryptocurrencies – splits into two separate parts. One part is the continuation of the initial blockchain. The other part contains this initial blockchain as it was until the time when the fork occurred.
During a fork, an identical number of new cryptocurrency coins are created on the new part of the blockchain. This means that, after the Bitcoin Cash fork, owners of Bitcoin held exactly the same number of Bitcoin and Bitcoin Cash at exactly the same addresses. After a fork, both parts develop completely independently of each other.
Tax Implications of a Hard Fork
The newly created coins can be of high value. A single Bitcoin Cash, for example, is worth more than EUR 1,000.00 at the time of writing. Such sudden capital gains naturally raise the question as to whether or not they are subject to taxation. And if so, how?
The answer is complex and differs from one fork to another and from one taxpayer to another. The decisive factor is whether you acquire your cryptocurrency privately or commercially, e.g. through mining.
In case you own your cryptocurrencies exclusively for private purposes, the next question that arises is whether or not the currency is sold within the speculation period of one year. And if so, what was the moment of acquisition? This might be either the date when the initial coins were acquired or the moment when the hard fork occurred.
German Attorneys Advice on all Aspects of Hard Forks
Unfortunately, the tax-related questions arising in the context of a hard fork cannot be answered in a generally binding way. Rather, the answer depends on the individual case concerned. Our experienced attorneys specializing in tax law and the law of cryptocurrencies will be pleased to examine your individual situation.