Inside Chain Splits

A chain split (or fork) happens when a blockchain diverges into two or more competing versions. Each version shares the same transaction history up to a certain point, but follows a different set of rules or consensus mechanisms afterwards.

There are two main types of forks:

1. Hard Forks: A permanent, non-backward-compatible change to the protocol. This creates two separate blockchains that no longer recognise each other’s blocks or transactions.
   Example: Bitcoin Cash (BCH) splitting from Bitcoin (BTC) in 2017.
2. Soft Forks: A temporary, backward-compatible change. Nodes running the new software can still validate blocks under the old rules, so the network remains unified unless disagreements persist.

At the moment of a hard fork, all prior transactions are duplicated across both chains – so holders of the original crypto may also receive tokens on the new chain.

Why do chain splits happen?

• Developer disagreements – Conflicts over scalability, ideology, or technical direction.
• Software upgrades – Introducing new features, improving speed or security.
• Bug fixes – Patching vulnerabilities or correcting protocol flaws.
• Open-source freedom – Anyone can copy and modify blockchain code, so new versions can emerge at any time.

How often do they happen?

More often than you might think:

• Accidental splits occur when two miners produce a block simultaneously; the shorter chain is quickly discarded.
• Soft forks happen frequently as temporary upgrades.
• Hard forks are rarer, but many major cryptocurrencies – including Bitcoin Cash and Ethereum Classic – were born from them.

How the ATO sees it

If you receive new crypto because of a chain split:

• The value of the new asset is not treated as ordinary income, and
• You don’t make a capital gain when you first receive it.

However, when you sell, swap or gift that new asset later, you’ll need to calculate any capital gain or loss.

• The cost base of the new asset is zero ($0).
• If you hold it for 12 months or more, you may qualify for the CGT discount.

Note: Different rules may apply if you’re carrying on a crypto-related business.

Step 1: Identify which crypto is “new”

When a split occurs, determine which coin continues the original chain and which is the new asset.

Ask:

• Which version keeps the same rights, relationships, and consensus rules?
• Which one introduced protocol changes?

The version that continues unchanged is the original asset. The altered one is treated as new for tax purposes.

Step 2: When the original no longer exists

Sometimes neither version fully continues the old chain. If the original protocol ceases to exist, a C2 CGT event occurs.
Each new coin you hold is treated as a new acquisition with:

• a cost base of $0, and
• an acquisition date equal to the fork date.

Quick Steps: Tax treatment of chain splits

• Record the date of the split.
• Identify which asset continues the original chain.
• Assign a cost base of $0 to the new asset.
• Track holding period to check for CGT discount eligibility.
• Report capital gains or losses when you sell or swap the new asset.

The Final Buzz

• Keep exchange or wallet records showing when the fork occurred.
• Some exchanges may not support the new asset immediately – you might need to claim it manually.
• Always verify the legitimacy of forked tokens before interacting with them.

Source: Australian Taxation Office

Note: This article is for education, not advice. For personal tax matters, speak with a qualified accountant.

Keep building your crypto knowledge. Up next: Crypto and the ATO: What Every Investor Needs to Know →

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