Taxes When a Cryptocurrency Splits Into Two

The IRS ruled that cryptocurrencies are treated as property (like stocks and bonds). What happens when a cryptocurrency splits into two separate cryptocurrencies?

Let’s start with the analogous situation with a stock. Suppose Acme Industries, Inc. spins off its subsidiary, SubCo Inc.; on October 1st stockholders of record will receive one share of SubCo for every share of Acme they own. This is almost certainly a tax-free event. (For those who care, Internal Revenue Code (IRC) Section 355 governs corporate spinoffs. Tax-free spinoffs can be accomplished either by distributing shares based on current ownership or by giving shareholders the option to exchange shares for the new spun off entity.)

Now, let’s examine a cryptocurrency split. Let’s take HYPO, a hypothetical cryptocurrency. On October 1st everyone who has 1 HYPO will still have their HYPO but will also now own 1 THET. The published goal is so that more transactions can be run through the blockchain. Will this be a tax-free event?

Probably. IRC Section 355 doesn’t apply here; this is not a corporate spin-off. That said, the analogy should hold: Presumably nothing of value has been created. If HYPO was selling for $1,000 prior to the split, the sum of 1 HYPO and 1 THET should be worth the same $1,000 after the split. If that’s the case all that’s happened is that your basis in HYPO must be split into HYPO and THET. For example, if you purchased your 1 HYPO for $500, your basis post-split in HYPO and THET must add to the same $500. There wouldn’t be a capital gain based on the split. (The allocation should be based on the fair market value of HYPO and THET immediately after the split.)

One other question that must be answered: Do you obtain the same holding period for the spin-off as you had for the original cyrptocurrency? If it’s a true split into two cryptocurrencies, definitely.

Given there has been one cryptocurrency split already (and others will certainly follow) this will give you an idea of the basics in this situation. Something that absolutely holds is keep good records! Taxes when you have good records is fairly easy. When you don’t have good records, it’s definitely not.

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