Imagine if I told you that, for every dollar you have, I’d give you a matching dollar of a new currency.
That, in the crypto world, is called a “fork.” Bitcoin has undergone more than 100 forks, with users able to claim all manner of seemingly free coins.
Critics already think crypto’s value is made up. A fork will give them an anxiety attack. This new coin that you’ve received due to a fork – where does its value come from?
It can be a bit of a philosophical riddle – where does value itself come from? But it’s also a practical question because there are taxation issues.
Now, an upcoming major event in crypto, the conclusion of an upgrade to the Ethereum network due in September, called The Merge, gives us a bit of an answer.
There’s nothing philosophical or abstract about that answer, though. It’s just cold, hard math.
In simplistic terms, a fork is a clone of a coin and its network. One of the most famous forks happened in 2017, when developers could not agree on certain network upgrades to bitcoin.
Because bitcoin is decentralized and open source, no changes can happen without a majority of the community agreeing to it.
So, one camp in that upgrade debate decided to go off on its own and make a version of bitcoin that had their desired upgrade.
Because of crypto’s quirks, that gave every bitcoin holder an equivalent amount in the cloned “fork,” called bitcoin cash, which turned out to be quite a bit of money. One unit of bitcoin cash was worth about US$400 at the time, which was more than 10 per cent of bitcoin’s per-unit value of roughly US$3,000.
The Canada Revenue Agency has not issued specific guidance on how that should be taxed. But in the United States, the Internal Revenue Service considers a forked coin to be income.
That is, if you had one bitcoin at the time of the fork, the IRS considers the US$400 of the newly received bitcoin cash to be a gain, on top of the US$3,000 in bitcoin you already had.
The upcoming Ethereum Merge, though, shows that reasoning might not necessarily be sound.
In The Merge, Ethereum, the billion-dollar network on which most NFTs (nonfungible tokens) run, is moving to a a so-called “proof-of-stake” system, considered to be more environmentally friendly.
That, too, has caused division. There’s a camp within the Ethereum community now trying to fork a version of the network that preserves the current status quo.
Now, another one of crypto’s quirks is that it is easy to come up with all manner of derivatives, allowing people to bet on top of the things they already bet on. Like how sports betting gives people varying odds of different outcomes, these derivatives put a dollar figure on events we otherwise discuss only anecdotally – and in the new crypto market that has emerged around The Merge, there lies an answer to the value of forked coins.
The market around The Merge, acting like that of futures contracts, basically quantifies the values of two other coins:
- An ether that has already locked on to the new network
- An ether that is going to be on the potential forked network, which preserves the status quo
An ether on the new network is essentially the same as a coin on the old. But, theoretically, if you still hold ether on the old network at the time of the fork, you’d also get a matching unit of a new type of ether, the one on the forked network.
Currently, market forces are showing that an ether on the old network, at about US$1,800, is worth roughly what the other two are worth put together.
Especially when that is set against the wider movement of ether prices within the crypto sector, the conclusion to draw is that the value of the forked ether, at about US$60 currently, is not an added bonus on top of the original ether.
That US$60 has simply been subtracted from the price of the original ether. It’s like a stock split. There’s nothing really gained, for value cannot be created out of thin air.
For those who hold crypto themselves – through their own digital wallets and not on an exchange – it might be time to check how many forks have happened and how to claim the resulting coins.
Like unclaimed CRA cheques, that’s your money that you’re otherwise leaving on the table.
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