Hardfork means when the blockchain of a token leaves its previous path and hits a new one. This process creates a new currency. For example, in August 2017, Bitcoin Cash (BCH) was created as a derivative of Bitcoin (BTC), the best-known cryptocurrency so far.
Cryptocurrencies are constantly evolving as well. Therefore, every now and then modifications of their protocols become necessary. This way, various new features or updates are integrated. These can be small additions, but also larger changes, such as the block size.
Such changes do not always enjoy the full approval of the community. This often leads to a split in the miner community. One part continues to use the "old" blockchain and the other part uses the new blockchain. The result is a crypto hardfork or ledger split and thus the creation of a new cryptocurrency.
How hardforks are taxed in Germany is still not entirely clear and gives rise to different points of view.
- Acquisition cost EUR 0
On the one hand, it is assumed that in cases of a hardfork, in which digital assets have been received without any consideration having been paid, any taxable income and the acquisition costs of the new assets will simply be assessed at the amount of EUR 0 (cf. BMF statement of January 18, 2016, C 1 -S 2252/08/10004 :017, BStBl. I, 85, para. 116). This is in line with the application of the principles of the capital gains tax deduction procedure. Since hardforks merely represent a split of a previously acquired asset, this approach considers that the acquisition date of incoming digital assets is based on that of digital assets held.
- Hardfork as lottery win
Others support the assumption that in cases of hardforks the user receives cryptocurrencies without having purchased these or having provided any other service in return. The cryptocurrency is not transferred from the legal sphere of a third party to the user. It rather begins its "existence" only as part of the user's assets in the first place. The cryptocurrency is created directly in the wallets of the users, without their intervention. In this respect such events resemble a lottery win or a chance find (so-called windfall profits). In the absence of a purchase transaction, taxation in accordance with Section 23 (1) No. 2 of the German Income Tax Act (Einkommensteuergesetz, EStG) is not applicable in the case of subsequent sale. If the user does not provide services, there is also no other income as defined by Section 22 No. 3 EStG. As a result, this also does not constitute a taxable gift.
- Allocate original acquisition costs
Some also argue that a cryptocurrency hardfork is comparable to the splitting of a share, and therefore the acquisition costs of the originally acquired cryptocurrency would have to be divided in proportion to the prices of the two cryptocurrencies at the time of the fork. However, this is opposed by the fact that no assets from the existing coin are moving away towards the new coin. Rather both cryptocurrencies are ultimately without intrinsic value and depend entirely on the trust of the market participants. For this reason it cannot be predicted in any way whether the existing coin becomes the dominating one through a hardfork, whether the new coin gains the trust of the community, whether both are accepted by the market or whether the market loses confidence in both cryptocurrencies because of the hardfork.
The taxation of hardforks in Germany therefore depends on each individual case. Our experienced tax lawyers and tax advisors will be happy to examine your specific situation and assist you with your income tax return.
Would you like to know how your tokens from a hardfork are to be assessed for tax purposes in Germany? You do not know the tax consequences of selling cryptocurrency created by a hardfork? Our advisors for all questions concerning the taxation of ledger splits are happy to help.
We will gladly assist you with advice and support for questions regarding the taxation of cryptocurrencies in Germany. The easiest way to reach us is by e-mail (firstname.lastname@example.org), by phone (+49 69 76 75 77 80) or via our contact form for the taxation of cryptocurrencies.