The Problem: In 2014, the IRS issued guidance that would treat digital assets like property. However, there are many important questions that the IRS hasn’t addressed, including when it comes to “forked” digital assets.

What is a forked asset?

A “fork” is one of the ways digital assets are different from a dollar bill in your wallet. A virtual currency exists on a blockchain, which creates a ledger of that currency’s transaction history. If someone wants to use the open-source code of that existing blockchain to create a new blockchain, that will result in a fork: two blockchains and their respective virtual currencies. That means that a user who purchased one type of virtual currency could suddenly have that currency in their digital wallet along with a new currency, if the original blockchain was forked. For example, Bitcoin Cash is a fork of Bitcoin. A developer might create a fork to resolve a dispute between users or to address a security concern.  

The solution: The Safe Harbor for Taxpayers with Forked Assets Act will hold harmless taxpayers attempting to report gains or losses of their forked digital assets. The bill also delineates that receipt of a forked virtual currency may not constitute a taxable event.

The grace period established under the bill will continue until the IRS sets a clear and consistent set of rules regarding the tax treatment of forked cryptocurrencies.

You can read the bill in its entirety here

Background: In 2014 the IRS issued guidance which treats digital assets like property.

In 2018, Congressman Emmer introduced the Safe Harbor for Taxpayers with Forked Assets Act to provide a safe harbor for taxpayers with "forked" digital assets. The bill restricts fines against individuals making an honest attempt to report gains or losses with these assets until the IRS provides clear and consistent reporting guidance.

In April of 2019, Congressman Emmer led a letter along with 20 members of Congress to the IRS urging additional guidance.

In October of 2019, the IRS issued guidance stating that the receipt of a forked virtual currency is a taxable event. Taxpayers who receive forked virtual currency, however, receive it automatically when the fork occurs, often unwillingly and unknowingly. The result is a tax policy that places an additional tax burden on taxpayers who have not realized any change, and in fact may have no knowledge of this new tax burden.