US Tax Court to Decide if Crypto 'Hard Forks' Create Taxable Income
A pending case challenges the IRS's position that the passive receipt of new tokens from a blockchain split is an immediate income event, arguing taxpayers lack the necessary "dominion and control."
The US Tax Court is considering a landmark case, Rogovy v. Commissioner, that will address for the first time whether new tokens received from a cryptocurrency "hard fork" generate taxable income. The IRS assessed a $25.5 million deficiency against a couple who passively received tokens from nine Bitcoin hard forks, citing its 2019 ruling that such an "airdrop" creates ordinary income if the taxpayer can exercise dominion and control.
Sophisticated clients and counsel care because this tests the application of fundamental tax principles to novel digital assets. The taxpayers argue they never had an accession to wealth because accessing the new tokens was technically complex, would have exposed their primary Bitcoin holdings (in offline "cold storage") to significant security risks, and that they were unaware of most forks when they occurred. A ruling for the taxpayer could undermine the IRS's guidance and create uncertainty for digital asset taxation. A ruling for the IRS would solidify tax obligations for millions of crypto holders who may not realize they have received, or have practical access to, new assets. The court has denied the IRS's summary judgment motion, and counsel should watch for a decision establishing key precedent.