A dividend is not "new value" or "unrelated to your ownership stake". If you hold stock worth $100 and you get a $2 dividend, value of the stock drops to $98. Just like a stock split, or a cryptocurrency hard fork: before the event you had some assets worth $100 and after the event you have some assets worth $100. (Plus some -- mostly random -- fluctuation in asset prices.)

You are correct it’s not new value per se, I was sort of glossing over that.

A dividend is in fact unrelated to your ownership stake. Before a dividend and after a dividend, you continue to own the same percentage of the underlying entity. You could use the dividend to in fact increase your beneficial ownership stake by re-investing it in the security. What has changed is the market value of your shares -- and to your point, by the dividend amount.

With a crypto fork, what's happening is someone is creating a new asset out of thin air, by copying an existing chain. When that happens, you now have two "assets" X and Y. The value may not even be correlated in any way. If I forked the BTC chain to create MagicPonziCoin2, it's not going to change the value of BTC whatsoever. This is recording that there's some initial value to the post-fork coin. If the fork affects the original holding, you can recognize your gain or losses by selling. If the post-fork coin changes in value, you can recognize your gain or loss there by selling relative to the value at your acquisition.

Hoping on the analogy train (knowing full well that all our analogies will be somewhat imperfect because this tech is unprecedented). I don't think it's like a stock split or a dividend.

I think a hard fork is most like a company breaking itself apart (like eBay/PayPal into, well, eBay and PayPal). In the case of eBay/PayPal, each holder of the eBay stock also got PayPal stock 1:1, just like in a hard fork.

I did some quick research into this and found that the issuance of PayPal stock was NOT a taxable event: https://www.sec.gov/Archives/edgar/data/1633917/000119312515...

The relevant quote: "The separation will provide current eBay stockholders with equity ownership in both eBay and PayPal. We expect that the distribution of PayPal common stock will be tax-free, for U.S. federal income tax purposes, to eBay stockholders."

The reason this is similar to a hard fork is that, in theory, the two chains will splinter their hash power, their usage, and at the time, no REAL value is being transferred/created because of the fork (in theory).

There is, of course, the abstract concept that I'm calling "anti-synergy": when two groups are suffering being together and there is more global value in the world when they're apart.

Hard forks can not magically create money out of thin air. If the "new" chain has some value post-fork, that value has been siphoned off the "old" chain (technically neither is "new" or "old" relative to each other, but bear with me for a minute).

Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like_ this has been happening in past 2 years. It's an example of irrational market behavior. There is no* reason hard fork should create value.

*Sibling comment is also correct. A hard fork may create value by separating two entities which can thrive separately better than they can together. Similar to how a company that is shelling out dividends may be more valuable than a company which hoards cash.

However, in a rational market this information would be incorporated into prices _before_ the hard fork: there is still no rational reason for the total price of assets to magically jump after the event.

>If the "new" chain has some value post-fork, that value has been siphoned off the "old" chain

Not necessarily. I don't see how that follows at all.

>Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like_ this has been happening in past 2 years. It's an example of irrational market behavior. There is no* reason hard fork should create value.

How does that matter to the IRS whether market is being irrational or rational?

>However, in a rational market this information would be incorporated into prices _before_ the hard fork: there is still no rational reason for the total price of assets to magically jump after the event.

The crypto market is full of hype and irrational actors

> >If the "new" chain has some value post-fork, that value has been siphoned off the "old" chain

> Not necessarily. I don't see how that follows at all.

If you can make infinite money out of thin air by making infinite hard forks, go ahead. No-one's stopping you.

> >Suppose the opposite was true. If you could create value out of thin air like that, we could all get rich just by forking cryptos over and over again. I know it _seems like_ this has been happening in past 2 years. It's an example of irrational market behavior. There is no* reason hard fork should create value.

> How does that matter to the IRS whether market is being irrational or rational?

I didn't say it matters to the IRS.

> >However, in a rational market this information would be incorporated into prices _before_ the hard fork: there is still no rational reason for the total price of assets to magically jump after the event.

> The crypto market is full of hype and irrational actors

We are in agreement here.

Here's a reason: the market was unsure whether the fork would happen until the moment of voting.

Let's say the chain is worth $100 unforked and the value of forking is $10. The value might be $105 if the market only thinks forking is 50% likely, and can remain uncertain depending on how much voting information leaks out. If the fork succeeds, value jumps to $110.

I'm not making this up out of whole cloth either, merger arbitrage funds make a living on these price jumps in equities.

As a meta comment, it's probably unwise to make such sweeping negative claims in a field as varied and immature as economics/finance. You'll always find broad exceptions, since the definitions are all made up by humans out of convenience.

Ah, you're right. The uncertainty surrounding a hard fork can be a rational reason for a price jump after a successful fork.

I worry that this amounts to a requirement from the IRS to engage with many shady cryptocurrency forks. Entering your BTC wallet details into ShadyCoin's wallet app probably isn't a good idea, even if 1 ShadyCoin is apparently worth a bajillion dollars.

Yes, it even created a new type of shadyfork strategy: you can punish any crypto asset holders by creating a hard fork, then booking trades that establish a high market value for the new asset.

In fact, the way this rule is written, it's not even clear that you have to copy the whole block chain. You could issue a new currency to any address and cause them a taxable event.

I suspect this rule wouldn't hold up in court.

An even better analogy is a spin off, where a new entity is created out of the value previously contained in the original. (In theory, the value of a potential hard fork should be priced in before the fork happens and drop out after - and this happens in practice.)

The funny thing is that these are generally non-taxable if no cash changes hands: https://investinganswers.com/dictionary/t/tax-free-spinoff

The problem is you might technically incur a lot of loss which you will have to carry on for unforeseeable future.

Indeed, as you would incurring a capital loss in any other asset class.

As such, you should recognize that loss in the same tax year as the fork occurred, which is why I believe the selling pressure would be towards the tail end of the tax year whether the price goes up (to cover taxes on the distribution) or down (to recognize and true up losses). If you did that in the same tax year as the fork, you'd never have to carry forward the losses. Both the gain and the loss occur in the same year and cancel out (i.e. you'd never lose more than you gained from the fork).

All well and good for you to say that now. But we also can't rewind, there's no safe harbor, and the IRS doesn't appear to be collecting my marginal rate of income tax in the denominated coin. So if I've got a bag of BTG and BSV that's not been sold, I owe a lot for a scam that I didn't unload.

I couldn't disagree with you more about this being fair. it creates a market hazard (dumping), and it fails to recognize the conjoined-value at time of fork. Were the futures value treated as the cost-basis of the new coin, that would be fair.

Moreover, this is a clever way for the IRS to learn your complete BTC holdings AND to seek stricter legal precedents against you.

All in all, this is very bad for crypto

You can still suffer if the fork forces you to realize a gain as short term capital gain (higher tax rate than long term capital gain).

I expect this ruling to be challenged and ultimately settled in Tax Court. (I have zero investments in crypto, so no dog in the fight, but this seems patently unjust to me.)

An even better analogy would be a company splitting itself into parts. Gap will do it in 2020 for example.

Maybe, but when Gap splits up some assets go to one, some assets go to the other. When a coin forks, someone just hits copy-paste and lists it on an exchange. No assets are transferred, no value changes hands, because there's no intrinsic value to a crypto asset. A gap split-up yields no intrinsic change in value, just like if I take $100 and put it into 2 piles.

This is more akin to my forking the GitHub repo for MySQL and calling it MySQLCash (MCH, naturally). It doesn't change anything about the original; that only happens if the new asset wages an adoption campaign like BCH/BSV/Bwhatever, in which case the origin story is irrelevant.

Ah, yes, this is good nuance, but I would like to argue that there are intangibles that can be replicated across Gap's future spinouts. There will be aspects of the culture, certain processes, relationships, and perhaps even software, that will be instantly DUPLICATED the moment the company splits!

And remember, the value of a chain is not simply its code. In fact, you can argue that the code is NOT important AT ALL to the value of a chain, for the very reason that it is entirely open. The chain's valuation comes from the network - and arguably the most important of those (at least in the short term) - the users who transact on the chain, and the miners whose hash power push the chain forward, will splinter.

When a chain splits, the miners must make a decision on what percentage of their finite hash power should be allocated to each fork.

I'm actually of the belief that this analogy is VERY good.