In a case that has received little attention to-date, the IRS alleges that a bitcoin user who self-custodied his coins owes income taxes on assets created by Bitcoin forks that he never accessed or was even aware of before an IRS audit. The case presents the U.S. Tax Court with a question that matters well beyond this taxpayer: can strangers create taxable income for you simply by creating assets that your existing private keys can access?
For those not following the crypto ecosystem in 2017, one of the major sources of drama revolved around proposed changes to Bitcoin, such as larger block sizes. Unable to build broad consensus for their preferred changes, various groups forked Bitcoin and launched competing chains. These chains copied Bitcoin’s existing transaction history but came with names like Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, and other equally uncreative variations.
Because these forks carried forward Bitcoin’s transaction history, private keys controlling bitcoin at the relevant fork could also authorize transactions involving the new coins. For someone like Benjamin Rogovy, who self-custodied his BTC, that meant his existing keys could potentially access assets on those chains. Doing so required choosing to trust wallet software written to be compatible with the new chain and, if he wanted to sell, a willing buyer or an exchange supporting the asset.
But he largely chose not to. His position is that, apart from a small portion of his Bitcoin Cash, he never took steps to accept or access those coins. Some he regarded as scams that could compromise his private keys; others, he says, he did not even know existed. Like spam sent to your inbox, their existence did not mean he wanted anything to do with them.
The IRS nevertheless argues that possession of the private keys gave Rogovy actual receipt of the forked coins when they were created. It then relies on exchange prices to assign income to assets he never accessed.
Bitcoin Gold exposes a particularly striking problem with this reasoning. The IRS acknowledges that software needed to transact on that chain was not even publicly available immediately after the fork, yet maintains its broader argument that the keys established actual receipt. How can a taxpayer have already received an asset merely by holding a key when the means of using that key are not yet available?
The IRS’s theory that private-key possession alone establishes income is legally wrong. Simply holding keys that could authorize transactions on a blockchain created by someone else is not enough. The familiar legal formulation requires a clearly realized increase in wealth over which the taxpayer has complete dominion and control. Those requirements demand more analysis than checking whether a key would work if the keyholder found a compatible lock and could hypothetically use it.
Rogovy’s lawyers argue that copying a blockchain does not itself establish receipt, that accepting unsolicited assets requires affirmative conduct, and that substantial technical and security barriers prevented complete dominion over the unclaimed coins. They explain that the tokens on a new chain are not received from another person and are a continuation of the existing interest in Bitcoin, so there is no realization event. They also challenge whether the exchange prices cited by the IRS from after the fork establish the coins’ fair market value at the time the IRS claims they were received.
Coin Center has pressed the IRS for years to clarify guidance that left important questions unanswered in situations like this one. In 2019, the IRS issued Revenue Ruling 2019-24, explaining that a hard fork does not generate income unless the taxpayer receives new cryptocurrency. Under the ruling, a taxpayer can be treated as having received the coins once they have the ability to transfer or sell them, even if they have not actually done so. But the ruling did not clearly explain when someone who takes no action to access or accept unsolicited forked coins should be treated as receiving them. The absurdity is compounded by the substantial technical and security barriers involved, including the risk of compromising existing private keys.
Coin Center worked with members of Congress later that year to urge clarification that knowledge and affirmative steps matter. A 2021 IRS memorandum instead treated a Bitcoin Cash holder’s private-key control and immediate ability to transact as sufficient for income at the fork. The Rogovy case brings that disagreement into court and points out the absurdity of equating the ability to access an unsolicited asset created by strangers with taxable receipt.
The IRS’s misguided position reflects a similar approach to the one it has taken with block rewards, which we have discussed at length. It treats a technical feature as sufficient to establish taxable income without adequately accounting for longstanding tax principles of taxation. Rather than seeking special treatment, the case rightfully asks the IRS to explain why the same principles that govern receipt and acceptance elsewhere should not apply here.
Imagine you had a key to a storage locker where you kept your valuables. Without your knowledge, a stranger builds another locker, fills it with valuable merchandise, and makes its lock accept the exact same key. You did not request the merchandise, open the locker, or otherwise accept its contents. Why should the fact that your key works, by itself, establish that you received income?
We would look beyond the technical capabilities of the key. We should do the same here.
We plan to keep an eye on this case and look forward to the Tax Court’s ruling.