Merge, Ethereum’s crypto-currency, dominated September with its promises of faster transaction times and improved security. It also promised a 99% decrease in energy consumption. But, what about unexpected tax bills? Let’s examine.
The Merge event saw the Ethereum mainnet, which was the current proof-of work (PoW), blockchain, merged with the Proof-of-stake(PoS) Beacon Chain. This marked the end of PoW’s role as the consensus mechanism for Ethereum blockchain.
Ethereum joined other PoS blockchains like Cardano, BNB Chain and Solana on the Beacon Chain. Ethereum (ETH) is second in market capital after Bitcoin (BTC). Ethereum is also the blockchain that spearheaded decentralized finance and nonfungible token activities. There are many ramifications to the Merge, but what about tax implications for investors, traders, and businesses? Although it’s unlikely that anyone will be happy with a surprise tax bill, that could be exactly what they get.
What tax implications might there be?
We can take a quick trip back in time to the 2017 Bitcoin civil war. It ended in a split of the chain into Bitcoin Cash (BCH) and Bitcoin Cash. This was a hard fork.
BTC holders received new BCH coins. This resulted in taxable income equal to the fair market value of the BCH. Capital gains tax was also applicable to any gains or losses accumulated by BCH holders who later disposed of their coins.
Related: Post-Merge Ethereum has become obsolete
Are there rumblings of civil war within the Ethereum community because of the Merge There are rumblings and it appears that some Ethereum miners could support the PoW consensus. The ticker ETHW stands for EthereumPoW. This forked version of Ethereum could continue with the PoW codebase, while ETHW will fork to the new proof–of-stake chain.
Tax implications are dependent on where you live — your tax residency.
The Merge is not a subject of specific guidance by the Internal Revenue Service (IRS). However, ETH holders who receive an identical airdrop of ETHW are subject to income tax. This is similar to the BCH 2017. This is a matter that the IRS has provided clear guidance.
An airdrop of ETHW in the United Kingdom is treated differently. The guidance states that an airdrop of ETHW is not subject to income tax. HM Revenue and Customs went one step further and gave guidance about what it calls a one-way transaction — citing the Ethereum mainnet upgrade to Beacon Chain. This scenario will be covered by section 43 of The Taxation of Chargeable Gains Act. The Merge did not trigger a capital gains tax-taxable event. Instead, your existing ETH’s cost basis is attributed to your token ETHW and any subsequent dispositions will be subject to capital gains tax.
What about mining and staking?
Investors and traders have the option to stake their ETH and get rewards. These rewards should be treated conservatively, even though tax guidance may not be clear.
U.S. holders are now subject to both income tax upon receipt of crypto mining and capital gains tax (CGT), following the Merge. Staking is still a contentious topic that is currently under investigation by the courts. This could change as the case progresses.
The U.K.’s ETH staking and mining reward are miscellaneous income, less certain allowable expenses. They are subject to income tax on receipt and CGT upon disposal. This depends on the level of activity, organizational structure, risk, and commerciality.
What are the odds of that?
The mainnet blockchain is merged into the new blockchain after a hard fork. All smart contracts and all data are transferred. An Ethereum hard fork differs from any other forks.
Merge was a planned upgrade. A ETHW fork is most likely to lack the support of exchanges, DeFi protocols, and oracles. ETHW will, my opinion, be an insignificant sideshow under the prevailing post Merge PoS chain.
Related: Federal regulators prepare to rule on Ethereum
This fork updates the protocol and is meant to be accepted by everyone. Token holders can convert ETH 1:1 to ETH 2.0 (PoW), and the original Ethereum is burned.
Investors and traders can benefit from this practical advice
Businesses and investors should be cautious and create a tax liability provision. It is not a good idea to find yourself in a difficult fork situation. In the worst case, your Ether value will drop significantly, which could impact your ability to raise funds to pay the crypto tax bill. This can only be transferred to your tax agency using fiat currency.
If ETHW proceeds are not taxable, it is easy to release the tax provision and reinvest those funds elsewhere, perhaps to buy more Ether.
Tony Dhanjal is the Koinly head of tax strategy and its brand ambassador. A qualified accountant and tax professional, he has more than 20 years experience in a variety of industries including FTSE100 and public practice.
This article is intended for informational purposes only and should not be construed as investment or legal advice. These views, thoughts and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Eileen Wilson –Technology and Energy
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