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Authors :
Free money, but not tax-free: a proposal for the tax treatment of cryptocurrency hard forks
Objective: to identify and study the issues related to taxation regime of cryptocurrency hard forks.
Methods: dialectical approach to the cognition of social phenomena, allowing to analyze them in the historical development and functioning in the context of a set of objective and subjective factors, which determined the choice of the following research methods: formal-legal, comparative-legal, sociological.
Results: 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.
Scientific novelty: the article elaborates and substantiates the methodology of cryptocurrency hard fork taxation. It explains the underlying technology of cryptocurrency hard forks, examines the recommended guidelines from the American Bar Association (ABA) and the Association of International Certified Professional Accountants (AICPA) on cryptocurrency hard fork taxation, and references the current practices in Japan and the United Kingdom. The author 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. At the same time, a concrete proposal is provided for the applicable coin valuation, tax basis, holding period, and tax rate for the two prongs. The proposed framework is closest to the nature of cryptocurrency hard forks and 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.
Practical significance: the main provisions and conclusions of the article can be used in scientific, pedagogical and law enforcement activities when considering the issues related to taxation regime of cryptocurrency hard forks.
Keywords :
Taxation regime; Tax; Tax declaration; Framework; Cryptocurrency hard fork; Cryptocurrency
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Citation :
Danhui Xu. Free money, but not tax-free: a proposal for the tax treatment of cryptocurrency hard forks, Actual Problems of Economics and Law, 2019, vol. 13, No. 4, pp. 1661–1683. DOI: http://dx.doi.org/10.21202/1993-047X.13.2019.4.1661-1683
Type of article : The scientific article
Date of receipt of the article :
20.09.2019
Date of adoption of the print :
05.11.2019
Date of online accommodation :
25.12.2019
