A Tax on the Clones: The Strange Case of Bitcoin Cash

Abstract

Having grown frustrated with the the ability of Bitcoin to act as a cash substitute, members of Bitcoin community formed a new cryptocurrency, Bitcoin Cash, in August 2017. The dissidents achieved their goal by cloning the existing Bitcoin system and grafting their desired features onto the clone. Because Bitcoin Cash cloned the original Bitcoin system, every owner of Bitcoin (as of August 1, 2017) became the owner of an equal number of Bitcoin Cash units. Their Bitcoin Cash was a pure windfall, and its creation did not seem to divert any value away from Bitcoin.

This article examines whether the windfall was taxable to the new Bitcoin Cash owners in August 2017 or at same later time (for example, upon sale). This issue turns out to be a difficult to answer. Some scholars argue that property windfalls (like when a baseball fan catches a record setting homerun ball) should not be taxable at the time of receipt. Also, the creation of Bitcoin Cash involved several difficult valuation and timing issues. What was it worth at creation? More fundamentally, when was it even created? Because of these difficulties, this paper proposes that owners be allowed to defer income under an “open transaction” approach, similar to what applies to executive stock options.

Readers should note that this article does not consider Rev. Rul. 2019-24, which was released as the article was going to press.

Keywords: Bitcoin, Bitcoin Cash, cryptocurrency, taxation, tax law