Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.
Some cryptoassets operate by consensus amongst that cryptoasset’s community. When a significant part of the community want to do something different they may create a ‘fork’ in the blockchain. There are two types of forks, a soft fork and a hard fork. A soft fork updates the protocol and is intended to be adopted by all. No new tokens, or blockchain, are expected to be created and there is no impact on the tax position.
A hard fork is different and can result in new tokens coming into existence. Before the fork occurs, there is a single blockchain. Usually, at the point of the hard fork, a second branch (and therefore a new cryptoasset) is created. The blockchain for the original and the new cryptoassets have a shared history up to the fork. If an individual held tokens of the cryptoasset on the original blockchain they will, usually, hold an equal number of tokens on both blockchains after the fork.
The value of the new cryptoassets is derived from the original cryptoassets already held by the individual. After the fork, the new cryptoassets need to go into their own pool. Any allowable costs for pooling of the original cryptoassets are split between the two pools for the:
- original cryptoassets; and
- new cryptoassets
Costs must be split on a just and reasonable basis. HMRC does not prescribe any particular apportionment method. It is standard practice (based on the treatment of shares, because cryptoassets use the same rules) that the cost of the original cryptoasset is apportioned between the old and new cryptoasset, pro-rata in line with the respective market values of each cryptoasset the day after the hard fork. The way an individual chooses to split the costs will affect their allowable costs for capital gains tax purposes.
HMRC has the power to enquire into an apportionment method that it believes is not just and reasonable. Therefore, whichever method an individual chooses to use, they should keep a record of this and be consistent throughout their tax returns.
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