Cryptocurrencies such as Bitcoin and Ethereum are powered by decentralized open-source software known as the blockchain. A fork is a change to the blockchain protocol or to the basic set of rules, which can result in the creation of two versions of the blockchain with different rules and values. A hard fork is a type of fork that splits the blockchain into two, creating an entirely new cryptocurrency. This new cryptocurrency has its own rules and value, and it is created from the original blockchain.
When a cryptocurrency experiences a hard fork, investors can decide where they want to keep their investment. The Internal Revenue Service (IRS) in the United States classifies cryptocurrency divisions as air deliveries and as taxable events. If an individual holds the keys, they must pay taxes for the new cryptocurrency using the fair market value of the cryptocurrency as income. It would be difficult for a retail investor or a miner to create a fork of any cryptocurrency, including Bitcoin. However, if you have a high risk tolerance, you could gain a lot by investing in cryptocurrency just before a fork or taking a chance with a new currency created during a fork. Cryptocurrencies such as Bitcoin Cash and Bitcoin Gold were created from the original Bitcoin blockchain through a hard fork.
If you've been mining cryptocurrency or investing in cryptocurrency for some time, it's important to understand how forks work and how they can affect your investments. Investing in cryptocurrency carries great risk, including the potential loss of your entire investment, as well as emotional distress. It's essential to do your research before investing in any cryptocurrency and to understand how forks work.
