Free Money, But Not Tax-Free: A Proposal for the Tax Treatment of Cryptocurrency Hard Forks

Cryptocurrency has attracted extraordinary attention as one of the greatest financial innovations in recent years. Equally noticeable are the increasingly frequent cryptocurrency events, such as hard forks. Put simply, a cryptocurrency hard fork happens when a single cryptocurrency splits in two, which results in original coin owners receiving free forked coins. Such hard forks have resulted in billions of dollars distributed to U.S. taxpayers. Despite ongoing regulatory efforts, to date, the Internal Revenue Service (IRS) has yet to take a clear position on the tax treatment of cryptocurrency hard forks. The lack of useful guidance when filing tax returns has left taxpayers genuinely confused in the past few years. To fill this regulatory gap, this Note proposes a framework for cryptocurrency hard fork taxation. It explains the underlying technology of cryptocurrency hard forks, examines the recommended guidelines from the American Bar Association and the Association of International Certified Professional Accountants on cryptocurrency hard fork taxation, and references the current practices in Japan and the United Kingdom to lay a solid foundation for the proposed framework. Ultimately, this Note proposes a two-pronged tax on cryptocurrency hard forks. The first tax is levied on the profit made from the receipt of forked coins, and the second tax is levied on the profit made from the disposition of forked coins. A concrete proposal is provided for the applicable coin valuation, tax basis, holding period, and tax rate for the two prongs. Aiming to propose a tax treatment that is closest to the nature of cryptocurrency hard forks, this proposal considers various practical concerns, such as the inefficiency of the cryptocurrency market, the indirect possession of forked coins through third-party exchanges, and the fluctuating trading prices of forked coins when determining the valuation, tax basis, and holding period. This proposal not only provides clarity for taxpayers in filing tax returns and fulfilling tax obligations, but it also relieves the potential tax deferral and tax evasion problems that arise after a cryptocurrency hard fork

Self-Organising in Blockchain Infrastructures: Generativity through Shifting Objectives and Forking

Given the ubiquity of digital technologies, and increased use of autonomous algorithms, it is likely that many of today’s social and organizational processes will one day include autonomous elements. The Bitcoin blockchain is likely the first case of an increasingly generative and autonomous way of organizing, and the specific properties of blockchain infrastructures—distribution of control, openness to manipulation, and generativity of the underlying source code—make it an ideal case to study patterns of self-organizing. This paper investigates the phenomenon of self-organizing through a study of forking in the Bitcoin blockchain infrastructure between 2010 and 2016. It adds to the emerging body of research on digital infrastructures, and particularly blockchain infrastructures, by conceptualizing forking as a pattern of self-organizing in blockchain infrastructures that specifically involves the underlying infrastructure, the scale of code changes, individual objectives, and collective adoption, whether specific or general. Thus, this paper demonstrates how forking in blockchain infrastructures mediates between divergent organizing objectives and existing capabilities, on the one hand, and generates self-organizing on the other hand. In this paper, we further contextualize our findings in extant work on digital infrastructures, offer a guide for designers of blockchain infrastructures, and propose the concept of “generative mirroring” as a pattern through which blockchain infrastructures and organizing adaptively coevolve

The forking effect

This study introduces the concept of the forking effect in the cryptocurrency market,specifically focusing on the impact of forking events on bitcoin, also called parent coin.We use a modified exponential GARCH model to examine the bitcoin's response inreturns and volatility. Our findings reveal that forking events do not significantlyaffect the bitcoin's returns but have a strong positive impact on its volatility, especially when considering market dynamics. Our model accounts for key features likevolatility clustering and fat-tailed distributions. Additionally, we observe that following a fork event, volatility remains elevated for the next three days, regardless ofother forking events, and the volatility impact does not increase when multiple forksoccur simultaneously on the same day

Forking Belief in Cryptocurrency: A Tax Non-Realization Event

When the community of believers in a cryptocurrency splits into two, the currency may experience a “hard fork” and split into two indepen¬dent currencies. Indeed, like fiat currencies, cryptocurrencies only have value if people believe they have value and are willing to use them in transactions. Hard forks do not create new value unless they inspire new belief; otherwise, they merely split the value of the original cur¬rency between the two new currencies. The Internal Revenue Service is wrong to conclude in Revenue Ruling 2019–24 that the value of the new currency resulting from a hard fork constitutes gross income in the hands of coin owners. A hard fork is properly understood as a divi¬sion of each coin of the original currency into two resulting coins and is no more a taxable event than when a property owner subdivides a larger parcel of land into two smaller lots. The appropriate question is not whether there is income, but how the owner’s basis in the original property should be split between the two resulting parts. After delving into the nature of hard forks and exploring the governing law, the author suggests an approach for basis allocation

The blockchain folk theorem

Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive

Relation between Bitcoin and its orks: empirical investigation on price movements and their respective volatilities

Cryptocurrencies gained increased interest recently with concern in various economic and financial related issues. Many investors made lots of money from cryptocurrency and others lost huge money from the same investment. The understanding of how this currency behave is thus crucial. This thesis aims to study the relation between Cryptocurrency and its forks. Specifically, we examine the effect of the forks of Bitcoin returns on the returns and volatility of Bitcoin and vice versa. Our sample includes prices of Bitcoins and portfolio of 17 forks for the period 2010-2017. We study the volatility of Bitcoin and its forks using the Dynamic GARCH model. Our model indicated that there is a strong positive relation between Bitcoin returns and the return of the forks of Bitcoin. However, from the volatility side the forks of Bitcoin has no effect on the Bitcoin returns