New Litecoin Fork Raises Tax Questions

2018-04-10T06:15:23+00:00 Cryptocurrency|

Litecoin – long touted by its founder as “the silver to Bitcoin’s gold” – is among the most popular virtual currencies. It may be even more popular after a recent hard fork split the coin into two. The first fork on Litecoin’s blockchain, called “Litecoin Cash,” took place on February 18, and bullish coin buyers rushed to take advantage of the new investment opportunity.

Some cryptocurrency investors are thrilled to receive forked coins and the windfall of cash they can bring. However, there is a great deal of uncertainty regarding how the IRS will tax forked coins. Now that tax season is upon us; investors must be sure to properly report all of their cryptocurrency income to the IRS. This can be a challenging task. Fortunately, however, Happy Tax is here to help! The cryptocurrency accountants at Happy Tax can provide all of the tax planning and preparation services virtual currency investors need to avoid unwanted attention from the Internal Revenue Service.

Why Cryptocurrency Investors Love (but Fear) Forks

New cryptocurrency coins are introduced to the market on a daily basis nowadays. Most tech entrepreneurs launch their new virtual currencies through Initial Coin Offerings, or “ICOs.” However, new coins developed through ICOs are entering an increasingly competitive market. As a result, many enterprises are now forking established cryptocurrencies rather than launching an entirely new competitor.

After a fork, new coins are created through a split of an existing blockchain. These coins are “airdropped” – meaning that they are given out without charge to anyone who owned the original coin the new ones were forked from at the time of the split. So, anyone who owned Litecoin on Sunday, February 18 can claim Litecoin Cash coins equivalent to their Litecoin holdings at the time of the split.

Litecoin Cash was trading at a meager $8.46 at the time of writing this article, but it had already jumped up over 200 percent since it launched a few days prior. All Litecoin holders received a Litecoin Cash airdrop on Sunday if they held their original Litecoins in a compatible wallet or exchange. Cryptocurrency investors have shown great interest in this recent fork, but its long-term value remains to be seen.

Since Bitcoin – the world’s first virtual currency – was launched nearly a decade ago, thousands have followed in its wake. Some, like Litecoin, Ether, Ripple, and thousands of others made new coins that solve some of Bitcoin’s inefficiencies. Others, like Bitcoin Cash and Bitcoin Gold, create new coins by spinning off the original. In their purest form, cryptocurrency forks are designed to improve on the original.  As a result, many forked coins have the potential to seriously compete with, or even replace, the originals. Many others, unfortunately, are get-rich-quick schemes for scammers or new, unsecured vehicles for hackers to access your wallet.

“Free Coins” Raise Scamming Concerns

Many cryptocurrency investors gobble up forked coins as soon as they are launched. Essentially, they see an airdrop as free money – simply claim the coins you’re entitled to after the fork and watch as they increase in value. However, as our economics teachers always insisted, there ain’t no such thing as a free lunch. And when it comes to “free” airdropped coins, this is absolutely true. In fact, claiming a forked coin may put you at greater risk of theft and fraud.

As with any forked coin, claiming Litecoin Cash requires Litecoin owners to disclose their private wallet keys. When legitimate, this wallet key is used to ensure the person claiming the airdrop actually did own Litecoin at the right time, and if so, verifies how much they had. However, hackers often use the launch of new forks to set up phishing scams. Thieves then use the private keys they steal to unlock and empty the virtual currency wallets of unsuspecting victims.

It bears mentioning that the company behind the original Litecoin has called Litecoin Cash a scam. Even when forked coins aren’t penetrated by hackers, there is still a risk that the whole arrangement is a “pump and dump” scheme. In other words, tech-savvy scammers get people to start trading the forked coin to pump up the price. Then, the developers dump their own coins – which they typically retain rather than releasing at the time of the fork – at the inflated price. This scam simultaneously makes the developers a ton of cash and crashes the market. There is a great deal of skepticism about the Litecoin Cash fork, so investors are urged to be cautious if they choose to claim their airdropped coins.

With more and more forks on the horizon, investors can become overwhelmed trying to separate the winners from the losers. However, thorough research is the basis for any good investment.  Before buying a new coin or equity token, look into the company launching it. The team behind the project, and the type of product or service they offer. In an unregulated market, the advertisement and marketing of any new coin is not a good indicator of whether it’s a good investment. As a result, coin buyers should beware.

Protecting Your Cryptocurrency Assets

Whether Litecoin Cash is actually a useful new coin or a get-rich-quick scheme remains to be seen.  Regardless of the new coin’s fate, protecting your investment should always be a top priority. First and foremost, this requires good wallet security. However, hackers and scammers aren’t the only ones after your hard-earned coins – the IRS wants its piece too!

If you’re not sure how to properly report income from forked coins on your tax return, you’re not alone! Forked coins raise many novel tax questions, and only the most up-to-date and highly trained cryptocurrency accountants really know how to deal with them. Happy Tax has the best and brightest cryptocurrency-trained accountants that can help you prepare your tax returns right this year. Now that tax season is upon us, contact Happy Tax to help you file your returns. If you’ve invested in forked coins, you’ll be glad you did!

Even if you just joined the cryptocurrency craze this year, smart investors plan their finances with an eye towards minimizing tax exposure. Happy Tax is here to make sure you avoid the tax pitfalls that may impact your virtual currency investments. The Certified Public Accountants at Happy Tax can work with you to minimize your tax payments in a safe, legal, and effective way.

About the Author:

Speaker. Author. Visionary. Mario Costanz amongst many other things excels in these categories. As a longtime avid blockchain and cryptocurrency enthusiast, Mario saw a need for quality tax preparation in the crypto trading community and launched CryptoTaxPrep.com as a division of Happy Tax. CryptoTaxPrep.com has positioned itself as the industry leader in cryptocurrency tax preparation. Mario was recognized by Forbes as one of the “Gutsiest Entrepreneurs” in the world and holds many rankings and accolades with Entrepreneur Magazine, Accounting Today, and many Blockchain/Crypto industry leaders. Email Mario at mario@happytax.com for more info or marketing@happytax.com to book for a media appearance.