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, creating a new, incompatible version. Below you will find more information about what a hard fork is, how it works, the different types, 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 the blockchain splitting into two separate chains. This change is not backwards compatible, meaning that nodes not using 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, specifically regarding the rules for transactions and blocks.
Blockchain splitting
The change results in the creation of a new blockchain, while the old one continues to exist.
New cryptocurrency
Typically, a new cryptocurrency is created that exists alongside the original one.
How does a hard fork work?
The hard fork process involves several steps and stakeholders, including the developer community, miners, and users. Here is a step-by-step explanation of the process :
Proposed minutes
A change or improvement to the protocol is proposed, often by the developer community .
- Discussion and consensus
The proposed change is being discussed within the community, and efforts are being made to reach a consensus .
- implementation
If sufficient support is available, the change will be implemented in the code. - Activation
At a predetermined time or upon reaching a specific block height, the hard fork is activated, resulting in the splitting of the blockchain . - Formation 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 rules for the blockchain.
Example
Increased block size, changes to consensus mechanisms.
Conflict-based hard forks
Description
Hard forks arise due to disagreements within the community.
Example
Bitcoin Cash (BCH) and Bitcoin SV (BSV) from the Bitcoin network.
Upgrades and security forks
Description
Hard forks are used 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 through a hard fork can be complex. Here are some basic guidelines:
Income tax
- Gain from new coin:
Cryptocurrencies created through a hard fork are considered a taxable inflow and must be taxed as income at market value on the day of inflow. - Evaluation:
The value of the new coins at the time of access is recorded as taxable income. - Speculation period:
Profits from the sale of the new cryptocurrency are subject to the one-year speculation period according to § 23 EStG (German Income Tax Act). If the coins are held for more 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 considered income from a business operation and are subject to trade tax in addition to income tax.
VAT
- No sales tax:
The allocation of new coins through a hard fork is not considered subject to sales tax in Germany.
Documentation and proof requirements
It is important to accurately document all transactions and the receipt of new coins. The burden of proof lies with the taxpayer. The following information should be recorded:
- Date of the hard fork and access to the new coins
- Value of the new coins at the time of access
- Transaction details and wallet addresses
- Sale and Gains/Losses
Summary
A hard fork is a significant change to the blockchain protocol that results in a new, incompatible blockchain and usually a new cryptocurrency. In Germany, the tax treatment of cryptocurrencies resulting from hard forks is subject to income tax and must be carefully documented.
This information serves as general guidance and cannot replace individual tax advice from our experts. Tax treatment may vary depending on your specific situation and current tax regulations. It is strongly recommended that you contact our lawyers to clarify your personal tax situation and ensure compliance with legal requirements.