You make the call

Question: George is a single taxpayer who owns virtual currency investments and is curious about the tax implications of his two hard forks and one airdrop transaction during the year. The first hard fork results in the creation of 60 units of a new virtual currency, which are airdropped into George’s account. He immediately obtains dominion and control of the airdropped units. The new units have an FMV of $350 per unit at the time of the airdrop and an FMV of $100 per unit at the end of the year. The second hard fork results in the creation of 20 units of virtual currency, with no airdrop. The units have an FMV of $100 per unit at the time of the hard fork and an FMV of $150 per unit at the end of the year. Does George have taxable income resulting from these transactions and what is his basis in the units received?

Answer: Yes, George will have taxable income resulting from these transactions. The first hard fork creates taxable ordinary income to George because it was followed by an airdrop. His taxable income from the airdrop is $21,000 (60 units x $350 FMV on date of the airdrop). No taxable income results from the second hard fork because there was not an airdrop following the hard fork. His basis in the new units created by these transactions equals the amount of taxable income recognized, giving him a $21,000 basis in the 60 airdropped virtual currency units and a $0 basis in the additional 20 units created in the second hard fork transaction. The FMV at the end of the year is not relevant.