The cost basis of split coins

Introduction What really happened on 1 August 2017 and how to calculate the cost basis of coins coming from a split? Chain branching The original single chain of blocks grew two separate "chain branches" (continuations): There was a chain branch adhering to the ruleset called "BTC". Importantly, this chain branch did not adhere to the ruleset (was not valid when judged by the rules) called "BCH". Vice versa, there was a chain branch adhering to the ruleset called "BCH". Importantly, this chain branch did not adhere to the ruleset (was not valid when judged by the rules) called "BTC". Since the chain branches became separate, it was possible to manipulate them separately. What happened to the existing coins? After the chain branching, an existing single coin (unspent transaction output = UTXO) was recorded in both (now separate) chain branches, still having its original properties such as transaction ID, output number, address, public key and private key. Being separate and separately manipulable after the chain branching, each of the chain branches allows an owner of a coin (UTXO) existing before chain branching to manipulate the coin (UTXO) separately. Depending on the chain branch in which it is manipulated, the identity of the coin (UTXO) effectively split in two: When manipulated on the BTC branch, the single original coin (UTXO) can be manipulated as a BTC coin. When manipulated on the BCH branch, the single original coin (UTXO) can be manipulated as a BCH coin. Are the post-branching BTC identical with the pre-branching BTC? Some people fervently claim that the post-branching BTC are identical with the pre-branching BTC referring to a "majority opinion" as if the majority opinion could have been a criterium of the truth. However, the correct answer is "No." Here is the proof: The owner of a pre-branching BTC had some ownership rights. Only if the ownership rights of the post-branching BTC are the same as the ownership rights of the pre-branching BTC, we can say that the post-branching BTC are identical with the pre-branching BTC. However, as explained above, one of the factual ownership rights of the pre-branching BTC was the right that the owner of the pre-branching BTC would become an owner of both the corresponding post-branching BTC as well as the owner of the corresponding post-branching BCH. This specific right is not an ownership right of the post-branching BTC. What happened to the cost basis of the original coin? Principles: Due to the identity split, after the chain branching there were two distinct split coin identities: BTC and BCH. Therefore, the owner of the pre-branching BTC had to split the original cost basis of the coin between the post-branching BTC and BCH. Chain branching did not influence the original cost basis of the coin. Naturally, the sum of the cost bases of the post-branching BTC and BCH coin splits must be equal to the original cost basis of the coin. Since the coin effectively split in two, it was up to the owner to split the original cost basis of the coin between its BTC and BCH splits fairly. What does that mean? To determine the cost basis of the coin splits fairly, the owner must determine the ratio in which the coin split. The split ratio can be determined fairly as the ratio of closing exchange values of the respective splits on the branching day. Example calculation On 1 August 2017, 1 bitcoin split to 1 BTC and 1 BCH. On that date, the closing price of BTC was $256.17 and the closing price of BCH was $16.37. For the purpose of this example, we assume that the cost basis of the presplit bitcoin was $259.16. An owner having a different presplit cost basis should use his own value instead. To split the cost basis fairly, we use the ratios in which the coin split. This gives the cost basis of a post-split BTC equal to $259.16 * $256.17 / ($256.17 + $16.37) = $243.59 and the cost basis of a post-split BCH equal to $259.16 * $16.37 / ($256.17 + $16.37) = $15.57. Conclusion Our calculation describes the fair way how to split the cost basis after a coin split. While having a practical purpose, our calculation also has a theoretical importance, demonstrating that the coins coming from a split have a definite fair cost basis, i.e. that they are not "free money" as some commentators mistakenly believe.