IRS Demonstrates Hard Fork Ruling Applications to 2017 Bitcoin Hard Fork

IRS Issues Guidance On The Tax Treatment of Bitcoin “Hard Fork”

In 2017, a “hard fork” was created that put Bitcoin transactions on a separate path from Bitcoin cash transactions. With the hard fork, any time a person purchased a bit of Bitcoin, an equivalent unit of Bitcoin cash was generated, but on a separate pathway. All Bitcoin transactions followed a different protocol than Bitcoin cash transactions. That meant that people could buy and sell in Bitcoin cash without influencing their Bitcoin holdings.

The IRS has issued guidance that holders of Bitcoin cash must pay taxes on it. The Bitcoin cash is considered gross income “if the hard fork results in a new cryptocurrency and the taxpayer actually or constructively receives the new cryptocurrency as a result of the hard fork.”

However, there has been trouble for some taxpayers who received Bitcoin cash but who had no way to access it to trade or sell. For example, some cryptocurrency exchanges did not deal in Bitcoin cash, so people who traded in Bitcoin on these exchanges did not get the equivalent cash. In one example the IRS provided, a taxpayer had Bitcoin through the exchange CEX. At the time of the hard fork, CEX was not certain about the future of Bitcoin cash and did not agree to support it. Therefore, the taxpayer was not able to access that Bitcoin cash. Later, CEX began supporting Bitcoin cash, and those assets became available to the taxpayer. The IRS ruled that the cash became taxable income only at that point.

There are many other situations that taxpayers may find themselves in where the distribution of Bitcoin cash is not completely obvious or clear-cut. Some may gain access to the Bitcoin cash through private ledgers, some may get delayed access, and some may deal with still other situations.

Rather than avoiding your tax obligations or claiming ignorance, you need to seek the advice of a tax professional. The IRS has targeted cryptocurrency in its enforcement efforts, and if it identifies transactions that it believes you should have reported, it will assess serious penalties. You will not be able to argue that you didn’t know you were liable or that you interpreted your obligation differently. You will owe a lot of money. It’s much better to get ahead of that situation and to sort out your tax obligations before you land in any hot water.

Work With An Experienced Tax Attorney

If you have been notified that you are being assessed penalties or will be audited over Bitcoin transactions, contact the tax attorneys at Silver Law to learn more about your legal options. Our experienced Arizona tax lawyers represent clients in audit and in civil or criminal litigation related to cryptocurrency and a variety of other tax matters. We’ll explore all your legal options to determine the best strategy for minimizing your tax liability and your penalties. We’ll also help you understand your obligations going forward so you can avoid any future trouble with the IRS. Call Silver Law today to schedule a consultation with a tax attorney to learn more.

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