Hardforks
A hard fork is a significant event in the world of blockchain technology and cryptocurrencies.
Hardforks at a glance - definition, types and tax relevance
Hard Forks: An Overview
A hard fork is a significant event in the world of blockchain technology and cryptocurrencies. It is a radical change to the protocol that results in a split in the blockchain and creates a new, incompatible version of the blockchain. In the following, you will learn more about what a hard fork is, how it works, what types there are, and how it is treated for tax purposes in Germany.
What is a hard fork?
A hard fork describes a significant change to the blockchain protocol, which results in the blockchain being split into two separate chains. This change is not backwards compatible, meaning that nodes that don't use the latest software version are no longer part of the new network.
Key features of a hard fork
Protocol change
The underlying code of the blockchain is being changed as far as the rules for transactions and blocks are concerned.
Splitting a blockchain
The change leads to the creation of a new blockchain while the old one continues to exist.
New cryptocurrency
As a rule, a new cryptocurrency is created that exists parallel to the original one.
How does a hard fork work?
The process of a hard fork involves multiple steps and participants, including the developer community, miners, and users. Here's a step-by-step explanation of the process:
Proposed protocol
A change or improvement to the protocol is suggested, often by the developer community.
- Discussion and Consensus
The proposed change is being discussed within the community and an attempt is being made to reach a consensus.
- implementation
If there is enough support, the change is implemented in code. - capitalization
At a specified time or at a certain block height, the hard fork is activated, which leads to the splitting of the blockchain. - Development of a new chain
A new blockchain with a new cryptocurrency is being created while the old blockchain continues to operate.
Types of hard forks
Rule-based hard forks
description
Changes to the protocol that introduce new regulations for the blockchain.
instance
Increasing block size, changing consensus mechanisms.
conflict-based hard forks
description
Hard forks that arise as a result of disagreements within the community.
instance
Bitcoin Cash (BCH) and Bitcoin SV (BSV) from the Bitcoin network.
Upgrades and security forks
description
Hard forks to introduce new features or fix critical security gaps.
instance
Constantinople upgrade on the Ethereum network.
Tax treatment of hard forks in Germany
The tax treatment of cryptocurrencies created by a hard fork can be complex. Here are some basic guidelines:
income tax
- Gain from a new coin:
Cryptocurrencies created by a hard fork are considered a taxable inflow and must be taxed as income at market value on the day of inflow. - Rating:
The value of the new coins at the time of receipt is recorded as taxable income. - Speculative period:
Profits from the sale of the new cryptocurrency are subject to the one-year speculation period in accordance with Section 23 EStG. If the coins are owned for more than a year, the capital gains are potentially tax-free.
Business tax
- Commercial activity:
If the newly created cryptocurrency is traded on a commercial scale, the profits are considered income from commercial operations and are subject to business tax in addition to income tax.
sales tax
- No sales tax:
The allocation of new coins through a hard fork is not considered subject to sales tax in Germany.
Documentation and obligation to provide evidence
It is important to accurately document all transactions and the receipt of new coins. The duty to provide proof lies with the taxpayer. The following information should be collected:
- Hard fork date and receipt of new coins
- The value of the new coins at the time of receipt
- Transaction details and wallet addresses
- Sale and gains/losses
Executive summary
A hard fork is a significant change to the blockchain protocol that results in the creation of a new, incompatible blockchain and usually a new cryptocurrency. The tax treatment of cryptocurrencies resulting from hard forks is subject to income tax in Germany and must be carefully documented.
This information serves as general guidelines and cannot replace individual tax advice from our experts. Tax treatment may vary depending on your specific situation and current tax regulations. It is highly recommended that you contact our lawyers to clarify your personal tax situation and meet legal requirements.