If so, then there's probably no market for the asset at that instant, so the fair market value is zero?
When Ethereum hard-forked, some miners kept mining the old chain, now affectionately known as Ethereum Classic. Seems like Classic is the original asset and what we now call Ethereum is the new asset.
Let's say I paid $200 for 1 ETH before the fork, and after the fork I own 1 New ETH worth $195 and one 1 Classic ETH worth $5.
Do I now owe tax on $195 even though the total value of New ETH + Classic ETH equals my acquisition cost?
The taxable event is when the coin appears in your Coinbase account.
Oh, you have your own wallet? Well, the IRS wasn't really thinking about that case.
> Do I now owe tax on $195 even though the total value of New ETH + Classic ETH equals my acquisition cost?
Let's say for simplicity sake that all this happened within the same calendar year. Here's where you're at.
You bought 1 ETC for $200 and now it's worth $5. That's a $195 unrealized capital loss.
Let's say you acquired your ETH from the fork and it was trading at $5 when you got it. You now have 1 ETH that has a cost basis of $5. This represents a $5 realized capital gain, and a $190 unrealized capital gain.
If you disposed of everything within the same year, it would be a complete wash, as your $195 capital loss would offset your $(190 + 5) capital gain.
If you carried your positions into the next tax year, you'd have to pay taxes on the $5 your ETH was worth when the fork happened at the end of year 1. Then in year 2, you have a $195 unrealized capital loss and a $190 unrealized capital gain. This would yield a $5 net capital loss, which you could use to offset other capital gains or carry forward into future years, deductible $3000 per year for the rest of your life.
In reality what happened though is that both ETH went up and ETC went up because a fork of a currency is just a copy-paste, as they have no intrinsic value and their performance afterwards is frequently totally uncorrelated other than in the way the whole crypto "market" is correlated to BTC.
I think you're absolutely right. The guidance only makes sense through this lens. It's unfortunate that the IRS didn't base their reasoning on the technical characteristics of the underlying blockchains. There is a whole lot of ambiguity as a result.
Q27. I received cryptocurrency that does not have a published value in exchange for property or services. How do I determine the cryptocurrency’s fair market value?
A27. When you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, then the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs.
If there is not [yet] a published value at the time of the airdrop, A27 seems to suggest that "the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs". If you received the cryptocurrency in exchange for nothing, I'd conclude that the fair market value was $0.
(IANAL, IANYL, YMMV, etc.)
An old but entertaining example, what's the inheritance tax value of a famous work of art that is illegal to sell because it contains a stuffed bald eagle?
https://www.nytimes.com/2012/07/22/arts/design/a-catch-22-of...
The more I look through this ruling, the more it seems like it is only designed for people who hold their cryptocurrency at an exchange. At an exchange, the exchange officially declares which coin is the "new one" and which coin is the "old one", so that isn't a problem for users. Plus, there's a clear distinction with whether the exchange provided you with a new asset during the fork, or whether the exchange did not provide you with a new asset during the fork.
So if you just use Coinbase, this ruling is perfectly clear. If you control your own wallet, it doesn't make as much sense.