What is fork?

A change to a blockchain's rules.

A soft fork is backward compatible; a hard fork is not and can split the network into two chains with separate assets, as Bitcoin Cash did from Bitcoin in 2017. Exchanges decide individually whether to support a forked chain and credit the new asset.

The word does double duty and that is the source of most confusion. It means a rule change, which is routine and happens on every chain, and it also means a chain split, which is rare. Every split involves a rule change; almost no rule change produces a split.

How it works

Nodes accept blocks that follow the rules their software implements. A rule change is a fork in the sense that the chain's history before and after obeys different rules.

A soft fork tightens the rules. Blocks valid under the new rules are still valid under the old ones, so nodes that never upgrade keep following the chain. Bitcoin's Segregated Witness activation in 2017 worked this way; see segwit.

A hard fork loosens or changes the rules so that new blocks are invalid to old software. Every node must upgrade. If everyone does, there is no split and the chain simply continues, which is how most planned network upgrades work. If a meaningful group refuses, two chains continue in parallel from the same history, and everyone who held the asset before the split holds a balance on both.

The two well-known splits followed exactly that pattern. Bitcoin Cash separated from Bitcoin in August 2017 over block size. Ethereum Classic separated from Ethereum in 2016 when part of the community rejected a state change reversing an exploit.

After a split, the two chains share history but nothing else. Balances diverge from the split block onward, and replay protection is added so a transaction on one chain cannot be rebroadcast on the other.

Example

Illustrative sequence for a contentious split. You hold 2 units on the original chain. At the split block your address holds 2 units on both chains. If your coins are in self custody, you control both, though claiming the second requires a wallet that supports it. If your coins are on an exchange, whether you receive the second asset is the exchange's decision, published in its own announcement, and some venues credit nothing at all.

Why it matters when you buy

Whether you receive a forked asset, and whether you can sell it, depends entirely on where your coins are held at the moment of the split. Exchange policies differ and are announced case by case, so read the venue's own notices; see the exchange pages and the change log at the changes feed.

Related terms

hard fork — the incompatible kind, soft fork — the backward-compatible kind, segwit — a well-known soft fork, chain reorganization — a temporary split with no rule change, consensus — what the rules define, airdrop — how forked balances are sometimes described.

Questions

Do I get free coins from a fork?

Only when a chain actually splits and only if you hold the asset at the split block. Most forks are coordinated upgrades that create nothing. Where a split does occur, whether you receive the new asset depends on who is holding your coins.

Is a fork dangerous for my holdings?

A coordinated upgrade is routine and requires nothing from you if your coins are on an exchange or in a maintained wallet. A contentious split creates confusion and attracts scams, which is where the risk actually sits.

Are forked coins taxable?

Treatment varies by jurisdiction, and several tax authorities treat receipt of a new asset as income at its value when you gain control of it. Check the rule where you live at the tax pages.