The IRS taxes income from whatever source derived, and income includes any net ascension to wealth. On August 1st Bitcoin forked, and I magically had Bitcoin cash. There are a few tax problems, and I haven’t seen any solid guidance on this issue.
- Record scratch: I’m a lawyer, but not your lawyer. I’m explaining my own thinking on Bitcoin Cash and not giving any advice. And there are a lot of Internet experts out there saying that no one has to even pay taxes on Bitcoin cash, because it was free money. PLEASE hire an actual accountant.
On the day of the fork, what was Bitcoin Cash (BCH) worth? As Bitcoin cash was volatile, there’s no way to determine the exact amount. I’ve logged mine at $300 to be safe, as the IRS would love to make an example out of someone to crush Bitcoin, and that someone ain’t gonna be me.
But even a $300 estimate has problems. I didn’t have access to my Bitcoin cash on August 1st, as my hardware wallet didn’t immediately support it. Does that change the analysis as to the date of my net ascension to wealth?
Even honest taxpayers are going to have some complicated conversations with their accountants.
And how does Coinbase’s decision to wait until December 19, 2017 to give people their BCH apply to taxable losses and gains? Coinbase gave people access to their Bitcoin Cash at a cost basis of around $1,889.
Will Coinbase holders be forced to pay income taxes on $1,880 per BCH basis?
This math has real implications.
Let’s say someone had 100 bitcoins on July 31st. On August 1st that person would have realized a net ascension of wealth of between $30,000 and $40,000 (depending on how you price the BCH). Will this be taxed at ordinary income tax rates?
If that same person had his Bitcoin in Coinbase, then she would have a net ascension of wealth in the amount of $188,000. At ordinary income tax rates, that’s a tax bill as high as $73,000.
And how does one calculate the long-term and short-term capital gains tax rates for Bitcoin cash? In the U.S., the top short-term capital gains tax rate is 39%, and the top long-term capital gains rate is 20%.
The Bitcoin cash fork occurred on August 1, 2017 and my BCH are priced at $300 per coin.
If I sell my BCH on August 2, 2018 for (say) $1,200, is my rate the long-term capital gains tax rate on the $800 gain?
What about the BCH Coinbase handed over on December 17, 2017. Must investors wait until December 18, 2018 to sell their BCH in order to take advantage of the long-term capital gains rate?
These are complicated questions, and the IRS has yet to offer any guidance.
One tax accountant suggests that Coinbase users will be taxed as follows:
4. What should I use as the date of the BCH?
The date you had control. This will often be the date of the fork, 1st August 2017. For instance if you held your coins in your own local wallet, e.g. Bitcoin core or Ledger, then you were in control of the BCH private keys on that date. If you held your BTC in an online exchange, it would be more likely the date they were available to you. With Coinbase, for instance, that will not be until 1st January 2018.
Although I can’t vouch for that website, their analysis is consistent with my research and understanding of tax law.
Anyhow, these are complicated issues and the IRS would love to destroy some people.
Please hire a competent tax professional and pay your taxes on cryptocurrency.
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