You didn't receive anything new. You already had the keys. There was simply a new client created to let you access these alternative coins.

If you own bitcoin private keys, you already own coins on an infinite number of hard forks. You're just lacking a client to access them.

the IRS sees it differently.

No, it does not.

The IRS specifically refers to when you recieves the tokens, on chain, in a transaction.

If there is no additional data, in the blockchain, then it is not an airdrop, according to the IRS.

Can you explain what the first couple lines about situation 1 on page 5 mean, according to your interpretation?

Sure, In situation 1 is says the following:

"A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A."

So I interpret the line "Crypto N is not airdropped or otherwise transferred", too mean that there are no additional transactions that are recorded on the new blockchain N to give people additional coins, but previous state is maintained, as maintaining state is not a transfer.

An airdrop would have to be an actual state change, "recorded on the distributed ledger", that says "These people now receive 200 coins". In the case of a normal hardfork, there is no transfer that is "recorded on the distributed ledger".

I interpret that as meaning some sort of additional transaction, on the blockchain.

If you notice, in situation 2, the key line to look at is as follows:

"The airdrop of Crypto S is recorded on the distributed ledger on Date 2 at Time 1 ".

It specifically says that something must be recorded on the ledger.

The reason why situation 2 needs to be called out, specifically, would be in the case of a developer, hard forking a coin, and giving themselves a developer dividend, for example. It would make sense why the additional transactions, that are "recorded on the distributed ledger" would need to be taxed, as it is referring to additional coins being airdropped.

Edit:

Ah, you were also referring to this line here:

" A did not receive units of the new cryptocurrency, Crypto N, from the hard fork"

I'd interpret this the same way. The user did not receive any units of the cryptocurrency. They had it all along. It would take an actual state transfer for them to "receive" it.

It sounds weird to say, but basically, they had these coins already.

You are reading it wrong.

There does not need to be a transaction on any ledger for the receipt of the forked coins to be income.

What makes them income is that you received the forked coins, whether that fork is a true fork or just a new ledger that is otherwise identical to the old one. The IRS doesn't care about those technical details.

Situation 1 would apply if for example you choose not to receive the forked coins or if for some reason your exchange didn't recognize the fork and thus never credited any new fork coins to you.

It specifically calls out "record on the ledger", though.

I don't know what it would even mean to have a "hard fork" which does not maintain the previous state of the blockchain.

Like, would that be talking about lite-coin, and arguing that it is technically a "hard fork" of Bitcoin?

Or would it be a "hard fork" which sets everyones balance to 0, but still maintains the old blocks from the fork? (For some unknown reasons...)

Both of those seem weird.

The document specifically calls out things that are recorded on the digital ledger though.

> I don't know what it would even mean to have a "hard fork" which does not maintain the previous state of the blockchain.

Some of these things have edited the prior state... heck even the purpose of the eth/etc hardfork was taking coins from the 'dao hacker' and assigning them to the ethereum foundation. There was some "united bitcoin" where you had to transact during some particular window to get granted coins, etc.

I agree that the case where there is a fork and where you don't get coins is degenerate-- plus the tax treatment in that case is obvious.

Thanks for your read on it. Okay, now -- later you sell those Crypto N coins. What is your cost basis? You also sell the M coins, whats the cost basis there?

[FWIW, I think the way you're reading it has fewer absurd effects, I'm just struggling to convince myself that they actually meant what you're describing.]

Yeah. I'd encourage everyone to check with tax attorneys to be sure because klodolph's interpretation seems a bit suspect at first blush. Check with an attorney, or preferably two, just to be sure because the consequences for getting this wrong are nontrivial.