Paul L. Caron

Friday, January 14, 2022

Realization's Vexations: Taxing Cryptocurrency Hard Forks

Arvind Sabu (Capital), Realization's Vexations: Taxing Cryptocurrency Hard Forks, 61 Jurimetrics J. 379 (2021):

A cryptocurrency hard fork seems to increase a holder’s fortunes—those who held Bitcoin, for example, nominally received an equivalent amount of Bitcoin Cash as a result of a famous hard fork. But this Article argues they should not be taxed based on the time of the fork, nor would they then be taxed under existing authorities.

Cryptocurrency hard forks represent innovative experimentation with changes to a cryptocurrency’s protocol in the rich modality of commons-based peer production—the modality responsible for Wikipedia and Linux. The tax system should not stifle this ex¬perimentation and the growth of the cryptocurrency commons by taxing hard forks based on when they occur. Relatedly, the indeterminate value of newly forked cryptocurrencies weighs against taxing hard forks based on when they occur.

Furthermore, hard forks are unlikely to result in the realization of income under foundational Supreme Court authorities, which in part key to concerns over valuation. The Internal Revenue Service’s ruling on this issue does not alter this conclusion; it il¬lustrates rather than resolves the vexing question of whether a hard fork results in the realization of income.

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