Tax News

No Gain or Loss Realized in Crypto Protocol Upgrades, According to IRS Memorandum

The Internal Revenue Service (IRS) has released a new Chief Counsel Advice (CCA) Memorandum, providing guidance on the tax implications of cryptocurrency protocol upgrades. The document clarifies that no gain or loss is realized in crypto protocol upgrades, a crucial piece of information for investors and developers in the rapidly-evolving digital currency space.

The memorandum, available on, offers a comprehensive understanding of the tax treatment of cryptocurrencies during protocol upgrades, also known as hard forks or soft forks. Protocol upgrades occur when changes are made to a blockchain’s underlying code, resulting in new features, improvements, or even the creation of a new cryptocurrency.

In the CCA, the IRS emphasizes that a protocol upgrade does not constitute a taxable event if the holder continues to hold the same cryptocurrency after the upgrade, and no new cryptocurrency is created as a result of the upgrade. This guidance is in line with the tax agency’s previous ruling, which stated that a taxable event occurs only when a new cryptocurrency is received as a result of a hard fork.

The memorandum further clarifies that a holder does not realize gain or loss when they participate in a cryptocurrency upgrade. This is because the holder’s pre-upgrade crypto asset and the post-upgrade crypto asset are considered “substantially similar” for tax purposes.

This new guidance is expected to be well-received by the cryptocurrency community, as it provides much-needed clarification on the tax implications of protocol upgrades. This comes at a time when many investors and developers are increasingly involved in the development and improvement of blockchain networks.

However, the CCA also reminds taxpayers that they must still report gains or losses on the sale or exchange of their cryptocurrencies, and any income received in the form of new cryptocurrencies from hard forks.

In conclusion, the IRS’s recent Chief Counsel Advice Memorandum offers important guidance on the tax treatment of cryptocurrency protocol upgrades. By clarifying that no gain or loss is realized in these upgrades, the IRS provides a level of certainty for investors and developers navigating the complex world of digital currencies. However, taxpayers must continue to be diligent in reporting gains, losses, and income from their cryptocurrency activities.

As the tax implications of cryptocurrency investments continue to evolve, it is essential to seek professional guidance in navigating this complex area. If you need assistance with tax matters related to cryptocurrencies or other tax issues, consider reaching out to The Tax Defenders at (312) 345-5440 for a free attorney consultation. Their team of experienced tax attorneys can provide expert advice and help ensure that you remain compliant with IRS regulations while maximizing your financial benefits. Don’t leave your tax situation to chance—get the support you need from knowledgeable professionals who understand the intricacies of the ever-changing tax landscape.