In an unprecedented event on August 1 this year, bitcoin split into a new currency following a ‘hard fork.’ It was also something a lot of bitcoin loyalists were trying to avoid since such a hard fork (or split) would lead to problems for both currencies down the road.
A Split To Suit Differing Interests
Because of discord within the mining community regarding the future of bitcoin, it was decided that a new offshoot currency, called “bitcoin cash,” would be introduced as a solution. Miners interested in bitcoin’s vision would continue unaffected while the rest could begin mining bitcoin cash instead.
While bitcoin itself has grown in popularity over its lifetime, bitcoin cash is still far from mass recognition. Only a small subset of people, mostly those who regularly trade cryptocurrencies, fully comprehend what it is.
Prior to release, bitcoin cash was essentially a copy of bitcoin’s original blockchain ledger. Following its release in August, only transactions involving bitcoin cash were recorded on the new blockchain. The split meant that every wallet that held Bitcoins at the time of the hard fork now had an equivalent quantity of bitcoin cash available as well.
Once the fork finished successfully, people had the choice to continue holding bitcoin cash or sell it. At that time, its market price varied between $300 to $500. Recently, however, bitcoin cash prices saw a steep increase following the failure of Segwit2X, another hard fork, scheduled to occur in November. Bitcoin cash reached an all-time high of $2,500 on November 12 and receded to around $1,000 soon after.
How the IRS Manages Cryptocurrency Volatility
The tough questions surrounding bitcoin cash’s rising valuation lies in how the IRS will tax profits from it. By its very premise, the new currency is free money for those who held any amount of Bitcoin before the fork. While some speculate that this incident bears similarity with a stock split, others argue that it could also be treated as a corporate dividend. Taxation of bitcoin cash relies heavily on what the final decision is.
Another possibility is that bitcoin cash might be viewed as merely a regular income. Since bitcoin cash was never paid for and simply obtained, it falls within reason that the IRS might declare it to be income. The second important question lies in bitcoin cash’s worth.
For tax purposes, one would think that the value of bitcoin cash would be its price at the time of selling it. Indeed, that is how taxation on capital gain works. If the IRS decides to lump bitcoin cash as ordinary income though, it might be imperative to pay taxes on it, regardless of whether it has been sold or not. The valuation of bitcoin cash would then be considered as its price at launch, around $400. People who sell their holdings while it is above this price are not at risk, as compared to those who wish to hold onto this currency.
The cryptocurrency market is one that is riddled with volatility, with bitcoin cash being one of the worst offenders. It is completely possible that its value could suddenly drop off entirely, leaving a sizable amount of tax to be paid. Until more information is made public, the topic of taxation on bitcoin cash will remain in limbo.