CRYPTO41600 – Cryptoassets for Business: Corporation Tax: Corporation Tax on Taxable Gains – blockchain forks – HMRC Internal Handbook

Some crypto-assets are not controlled by a central body or person, but operate by consensus within the community of that crypto-asset. When a significant minority of the community wants to do something different, they can “fork” the distributed ledger.

There are two types of forks, a soft fork and a hard fork. A soft fork updates the protocol and is intended to be adopted by all. No new tokens or distributed ledgers should be created. A hard fork is different and may result in the creation of new tokens. Before the fork happens, there is a single distributed ledger. Usually, at the point of the hard fork, a second branch (and therefore a new cryptoasset) is created.

The distributed ledger for the original and new cryptoassets have a shared history up to the fork. If an individual held tokens of the crypto-asset on the original distributed ledger, they will generally hold an equal number of tokens on both distributed ledgers after the fork.

The value of the new tokens is derived from the original tokens already held by the individual. This means that Section 43 of the Capital Gains Tax Act (TCGA) of 1992 will apply.

After the fork, the new tokens must go into their own Section 104 pool. All eligible costs in the Section 104 pool of original cryptoassets are split between the two Section 104 pools for original tokens and new tokens.

If an individual holds their tokens through an exchange, the exchange will choose whether or not to recognize the new tokens created by the fork.

Costs must be allocated on a fair and reasonable basis under Section 52(4) TCGA 1992. HMRC does not prescribe any particular method of allocation. HMRC has the power to investigate an allocation method which it believes is not fair and reasonable.

New tokens can only be cleared if the exchange recognizes the new tokens. If the exchange chooses not to recognize the new tokens, the individual may seek to spread all eligible costs over the original tokens. You will have to decide if this is fair and reasonable in the circumstances. The individual may instead spread the costs, but seek to make a negligible value claim against the new tokens. You will need to consider whether the conditions for making a claim of negligible value have all been met. In the event of difficulty, you must seek technical advice using the process for your field of activity.