The Ethereum merger is shaping up to be the biggest event in the crypto space for over five years, and it could have significant impacts on your crypto portfolio.
We know that between September 10 and 20, the merger will take place, which will result in the merger of the proof-of-stake “Beacon Chain” with the current Ethereum proof-of-work chain.
As speculation swirls around Ethereum forking and what could happen to DeFi protocols, stablecoins, NFTs and more, critical questions remain regarding the potential tax implications Ethereum holders could incur.
So what’s going on and what do you need to know? Koinly Crypto Tax Calculator is here to explain.
What is Ethereum Merge?
The ultimate outcome of the Ethereum merger will be the transition from proof of work (PoW) to proof of stake (PoS) as the consensus mechanism for the Ethereum blockchain. Ethereum developers have been signaling this move for years, with work beginning as early as 2016.
The current estimate is that the merger will take place between September 13 and 15, but this will ultimately depend on Ethereum’s Total Terminal Difficulty (TTD). Currently, this appears to be around a block height of 15,540,293. Merge-ready.
The Ethereum Foundation said that by moving to PoS, the blockchain reduce energy consumption around 99.95% – potentially attracting interest from ESG investors who have been sidelined due to the high power consumption of blockchains.
Ethereum Merger Taxes
With the merger likely to occur over the next few weeks of September, the calendar puts it in the middle of tax season for several countries (and towards the end of the fiscal year for others).
Timing will be important in the scenario where Ethereum eventually forks. For example, if the Ethereum network experiences a hard fork, some jurisdictions may treat it as “revenue,” similar to an airdrop. In this case, crypto investors would have to pay income tax on any additional tokens received.
Koinly’s Australian Tax Director, Danny Talwar, explains: “One of the reasons there has been so much speculation around the merger is the tax implications if the network forks. In a scenario where a hard fork occurs, there may be a taxable event. However, it depends of where you live.
For example, ETHW (representing the current Proof of Work Ethereum consensus mechanism) may continue to be supported by some miners after the merger. In this scenario, all Ethereum holders – who will be switched to the PoS chain, will also hold 1:1 ETH tokens on a PoW chain.
It is important to remember that many platforms will not officially support the PoW version of Ethereum. However, DeFi protocols, stablecoins and oracles will only recognize the PoS chain as the true version of Ethereum.
Circle has publicly stated there would be no value for stablecoin USDC tokens on an ETHW chain. Chainlink also said it would stop updating price oracles on ETHW, which would break most DeFi and other trading platforms without reliable price feeds. Opensea followed suitNFTs (representing ownership on the blockchain) being officially recognized only on the PoS version of ETH after the merger.
However, the tax implications of the merger do not all depend on whether or not the chain is split into a PoW and PoS version. With Ethereum shifting from mining to staking, various countries will have different tax treatments.
Ethereum staking vs mining taxes
Once Ethereum transitions to a PoS consensus mechanism, anyone wishing to contribute to the network will need to delegate their ETH via a staking pool – opening up the possibility for more crypto investors to get involved via staking rather than mining.
However, the taxes will depend on where you live and the tax treatment of staking in relation to mining in your jurisdiction:
In the USA, Crypto mining and staking is subject to income tax. However, the tax treatment of staking has been controversial, with a recent lawsuit against the IRS by two US taxpayers claiming a staking tax should be reconsidered. Currently, staking rewards are deemed to be taxed as income upon receipt and subject to capital gains tax upon disposal.
In Canada, the scale of your mining operations will affect the tax you may pay. Individuals and amateur miners currently do not have to pay income tax. However, they have to pay capital gains tax (CGT) when they have mining rewards. The CRA has yet to provide details on staking as income. However, staking under PoS is likely to be considered income, meaning you will likely have to pay both income tax upon receipt and CGT upon disposal.
In Australia, taxation of new crypto assets generated by mining depends on whether you are a hobbyist miner or operating a business or trader. Although recreational mining does not incur income tax, staking ETH for rewards or likely performance. Again, CGT is due on any mining or staking rewards upon surrender.
United Kingdom, Tony Dhanjal, Koinly’s UK Tax Director, says: “ETH staking and mining are generally miscellaneous income and subject to income tax on receipt and CGT on disposal. However, it depends on the degree of activity, organization, risk and commerciality.
So, with Ethereum moving to a PoS consensus mechanism, staking ETH will be much more accessible to the average crypto investor. However, there will likely be more instances where rewards and returns generated from staking will be considered taxable income.
Use Koinly to Simplify Your Crypto Taxes After the Ethereum Merger
Given the many scenarios that could occur after the Ethereum merger, it will be more important than ever to keep track of where your ETH and other crypto assets are.
Crypto taxes can be confusing. Fortunately, Koinly crypto tax calculator already has the tools you need to take control of your crypto wallet and track your crypto taxes.
Just import your ETH transactions from any crypto wallets or exchanges to Koinly. You can do this via a CSV file or API integration for most platforms and your public wallet address for wallets such as MetaMask. Once your data is imported, Koinly uses smart AI to automatically tag different transactions, including forks.
Koinly also supports NFTs, DeFi, airdrops, and more. With over 700 integrations on the most popular exchanges, wallets, and blockchains, Koinly can save you — and your accountant — dozens of hours of manual calculations by pairing intuitive software with tips. experts from expert in-house tax consultants.
About Koinly: Koinly calculates your crypto taxes for you, catering to investors and traders at all levels. Whether it’s crypto, DeFi or NFT, the platform helps you save valuable time by reconciling your holdings to generate a crypto tax report in minutes. Register today.
Disclaimer: Koinly is not a financial adviser. You should consider seeking independent legal, financial, tax or other advice to verify the relationship of this information to your particular circumstances.
This is a sponsored post. Find out how to reach our audience here. Read the disclaimer below.
Image credits: Shutterstock, Pixabay, Wiki Commons
Disclaimer: This article is for informational purposes only. This is not a direct offer or the solicitation of an offer to buy or sell, or a recommendation or endorsement of any product, service or company. bitcoin.com does not provide investment, tax, legal or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.