Soft forks are protocol changes to a blockchain (ETH to ETH 2.0 when The Merge occurs, for example) that remain compatible with previous versions and therefore do not create a taxable event. No new cryptocurrency is created in a soft fork. For now, just remember soft forks are not taxable, and we dive into the topic in much greater detail in the hard forks section of this book. Hard forks may or may not be taxable depending upon whether there is an accession to wealth. Receiving new cryptocurrency is an accession to wealth and is taxable; however, a hard fork that does not result in the transfer or airdrop of new cryptocurrency does not create taxable income.

When you inherit crypto assets, as defined by the IRS, you inherit property. The cost basis of the property is the FMV (average of the high and low for the day) at the time of death or six months later if the value of the assets has dropped and the alternate valuation date is elected. This election is only made when estate tax is due in order to lower the estate tax, which results in a lower cost basis and potentially higher capital gains tax upon disposition.

At the federal level, if estate tax applies (the 2022 estate tax exemption is $12.06 million), it is paid by the estate and no taxable gain or loss results to the inheritor. Regardless of how long the property was held by the decedent, it is treated with favorable LTCG tax rates upon disposition. Half a dozen states have an inheritance tax (not to be confused with estate tax) while a dozen states and Washington D.C. have estate taxes, with Maryland being the only state with both an inheritance and estate tax. While this book does not expand on the topic of state taxes or estate planning, some may consider putting crypto assets in a trust and ensuring the trustee has access so they do not go undiscovered after the taxpayer dies.

The IRS’s FAQ sums up the rules for receiving crypto as a gift:
“If you receive virtual currency as a bona fide gift, you will not recognize income until you sell, exchange, or otherwise dispose of that virtual currency. See Publication 559. Your basis in virtual currency received as a bona fide gift differs depending on whether you will have a gain or a loss when you sell or dispose of it. For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift. For purposes of determining whether you have a loss, your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift. If you do not have any documentation to substantiate the donor’s basis, then your basis is zero. Your holding period in virtual currency received as a gift includes the time that the virtual currency was held by the person from whom you received the gift. However, if you do not have documentation substantiating that person’s holding period, then your holding period begins the day after you receive the gift.”

IRS Publication 559 is designed to help those in charge (personal representatives) of the property (estate) of an individual who has died (decedent). It shows them how to complete and file federal income tax returns and explains their responsibility to pay any taxes due on behalf of the decedent.

When a U.S. person receives gifts from foreigners, the gifts are not taxable; however, taxpayers may be subject to reporting requirements that come with hefty penalties if certain forms are not filed in a timely manner. When a U.S. person receives gifts from a foreign person, estate, or related-parties, the taxpayer may be required to aggregate such gifts, and if they exceed $100,000 alone or in aggregate, they must file IRS Form 3520 and may be required to file FinCEN Form 114 (FBAR) or Form 8938 (much more on these later).