The American Bar Association (ABA) Section of Taxation has formally asked the US Internal Revenue Service (IRS) to create a safe harbor for investment gains realized from cryptocurrency hard forks.
In the letter, which was drafted by Section Chair Karen Hawkins, the ABA noted that several major developments have occurred in the cryptoasset space since 2014 when the IRS first provided guidance on how the agency treats cryptocurrency investments for federal tax purposes.
Chief among the Section’s concerns is a need for clear guidance on how investors should report gains associated with hard forks, which cause a blockchain to split into more than one version and provide current coin-holders with funds on both chains.
The most prominent example of this was the Bitcoin Cash hard fork, which awarded Bitcoin holders with an equivalent number of coins — coins that are presently worth $1,064 each.
Since US tax returns are due in less than a month, the Section recommended that the IRS adopt a “temporary rule, in the form of a safe harbor” for taxpayers who received funds from hard forks.
According to the Section’s proposed language, the hard fork would constitute a taxable event, but the initial value of the forked coins would be $0.
“Taxpayers who owned a coin that was subject to a Hard Fork in 2017 would be treated as having realized the forked coin resulting from the Hard Fork in a taxable event,” Hawkins wrote in the proposed guidelines. “The deemed value of the forked coin at the time of the realization event would be zero, which would also be the taxpayer’s basis in the forked coin.”
Consequently, investors would not have to pay taxes on the market value of the coins unless they later sold or otherwise disposed of them, at which point they would be taxed at full market value as capital gains — not ordinary income.
Though perhaps not a perfect solution, the Section argued that this treatment — at least for tax year 2017 — represented the most reasonable approach for both the IRS and taxpayers.
“This temporary rule has the benefit of encouraging consistency among taxpayers with respect to 2017 Hard Forks, avoiding difficult timing and valuation issues (including the ability of taxpayers to benefit from hindsight depending on how the values fluctuated during 2017), and providing information to the Service regarding holders of the original and forked cryptocurrencies,” Hawkins concluded.