What exactly does it mean to own a “fork” of a digital asset? Rep. Tom Emmer (R-Minn.) has asked the IRS for clarification on the matter.

Rep. Emmer proposed the Safe Harbor for Taxpayers with Forked Assets Act on May 17, a bill that would safeguard taxpayers who own “forked assets” from any penalties or fines imposed by the IRS for owning those assets. If the law succeeds, forked-asset holders will be shielded until the IRS issues clear guidance to individuals who might find themselves in this predicament.

What is a forked asset, and how does it work?

A fork of a digital asset is a digital currency that you may have acquired for free because you possessed another digital currency whose chain split into two. After the split, you will have two digital assets instead of one: the original asset you previously owned (1) and a new asset that you have got due to the blockchain split (2). Because both assets have a shared blockchain history up to the block where they fork into two independent chains, you will have the same balance of the new asset (asset #2) as you did of the original asset (asset #1) after the split.

Why is regulatory clarity required?

The IRS’s 2014 digital currency guidelines, which stated that digital assets are treated like property from a tax standpoint, may have influenced Rep. Emmer’s decision to introduce this bill. A few years later, the IRS issued guidelines in October 2019, stating that receiving a forked virtual currency is a taxable event—and there is where the problems arise.

When a blockchain divides into two, individuals who have forked assets automatically receive the forked asset. Nonetheless, some forked asset holders obtain the forked asset consciously or inadvertently.Suppose the IRS declares an asset fork to be a taxable event. In that case, it will impose a tax burden on those who may not have realized any gain or loss, or even know they got an asset for which they must pay tax; Rep. Emmer’s bill would safeguard these people until the IRS clarifies the situation.

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