Hardforks
A hard fork is a significant event in the world of blockchain technology and cryptocurrencies.
Hard forks 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 leads to a split in the blockchain and creates a new, incompatible version of the blockchain. Below you can find out 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 that results in a split of the blockchain into two separate chains. This change is not backwards compatible, which means that nodes that do not use the latest software version are no longer part of the new network.
Main features of a hard fork
Protocol amendment
The underlying code of the blockchain will be changed in terms of the rules for transactions and blocks.
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 stakeholders, including the developer community, miners and users. Here is a step-by-step explanation of the process:
Protocol proposal
A change or improvement to the protocol is proposed, often by the developer community.
- Discussion and consensus
The proposed change is discussed within the community and an attempt is made to reach a consensus.
- Implementation
If sufficient support is available, the change is implemented in the code. - Activation
The hard fork is activated at the specified time or at a certain block height, which leads to the blockchain being split. - Creation of a new chain
A new blockchain with a new cryptocurrency is 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.
Example
Increasing the block size, changing the consensus mechanisms.
Conflict-based hard forks
Description
Hard forks that arise due to differences of opinion within the community.
Example
Bitcoin Cash (BCH) and Bitcoin SV (BSV) from the Bitcoin network.
Upgrades and security forks
Description
Hard forks to introduce new features or to fix critical security vulnerabilities.
Example
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 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 the inflow. - Valuation:
The value of the new coins at the time of acquisition is recognized as taxable income. - Speculation 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 held for longer than one year, the capital gains are potentially tax-free.
Trade tax
- Commercial activity:
If trading in the newly created cryptocurrency takes place on a commercial scale, the profits are deemed to be income from commercial operations and are subject to trade tax in addition to income tax.
Value added 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 document all transactions and the receipt of new coins precisely. The burden of proof lies with the taxpayer. The following information should be recorded:
- Date of the hard fork and addition of the new coins
- Value of the new coins at the time of acquisition
- Transaction details and wallet addresses
- Disposal and gains/losses
Summary
A hard fork is a significant change to the blockchain protocol that leads to 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 a general guideline and cannot replace individual tax advice from our experts. The tax treatment may vary depending on your specific situation and the current tax regulations. It is strongly recommended that you contact our lawyers to clarify your personal tax situation and comply with the legal requirements.