There was a Proof-of-Work airdrop as a result of Ethereum's Merge.This suggests that you might be responsible for tokens you didn't even want.
In September, Ethereum's Merge dominated the cryptocurrency industry with promises of shorter transaction times, enhanced security, and a 99% energy savings.However, are you likely to receive a surprise tax bill as well?Let's look at it.
The Ethereum mainnet, which was the proof-of-work (PoW) blockchain at the time, merged with the proof-of-stake (PoS) Beacon Chain during the Merge event. This marked the end of PoW as the Ethereum blockchain's consensus mechanism.
Ethereum joined Cardano, Solana, and the BNB Chain as major PoS blockchains on the Beacon Chain.After Bitcoin (BTC tickers down $19,182), Ether (ETH tickers down $1,290) is the second largest cryptocurrency by market cap. Ethereum is the chain that has spearheaded decentralized finance (DeFi) and nonfungible token (NFT) activity.The merger has many repercussions, but what about the potential ones for investors, traders, and businesses?A surprise tax bill is unlikely to please anyone, but that may be exactly what they will receive.
What might it mean in terms of taxes?
If we take a quick trip back in time to 2017, we can see that Bitcoin's civil war ended with a split in the chain into Bitcoin and Bitcoin Cash (BCH tickers down $107).The term "hard fork" was coined for this occurrence, no pun intended.
In this case, holders of BTC received brand-new BCH coins, which resulted in taxable income for the recipients at their fair market value upon receipt.In addition, any accumulated gains or losses were subject to capital gains tax if any BCH holders later sold their coins.
Related:Is there a civil war brewing within the Ethereum community as a result of the merger? Post-Merge ETH has become obsolete.There are definitely rumblings, and it appears that some Ethereum miners may continue to back the PoW consensus.With ETHW continuing with the PoW codebase and ETH forking to the new proof-of-stake chain, this potential forked version of Ethereum already has the ticker ETHW.
The effects on your taxes are determined by where you live—your tax residency.
The Merge has received no specific guidance from the Internal Revenue Service (IRS) in the United States.However, just like with the BCH in 2017, ETH holders who receive an equivalent airdrop of ETHW are certain to be subject to income tax.This is clearly explained by the IRS.
An airdrop of ETHW is treated differently in the United Kingdom.It is inferred from the guidance that no income tax is assessed upon receipt.Going one step further, HM Revenue and Customs has offered some guidance on what it refers to as a "one-way transfer," citing the upgrade from the Ethereum mainnet to the Beacon Chain.It believes that this situation will be subject to section 43 of the Taxation of Chargeable Gains Act of 1992.Simply put, the Merge did not cause a taxable event that is subject to capital gains tax.Your ETHW token, on the other hand, receives the cost basis of your existing ETH, and any subsequent sales will result in a gain or loss as usual.
What about mining and stakeout?
Investors and traders can reap rewards when they stake (and lock in) their ETH.Even though the tax advice is murky, they should be conservative with these rewards.
Following the merger, crypto mining and staking are now both subject to income tax upon receipt and capital gains tax (CGT) upon disposal for holders based in the United States.Staking, on the other hand, is a contentious issue that is the subject of an ongoing court case, so this may change in the future as the case progresses.
Staking and mining rewards for ETH in the UK are typically treated as miscellaneous income (less certain allowable expenses) and subject to CGT upon disposal and income tax upon receipt.However, the level of activity, organization, risk, and commerciality all play a role in this.
What are the odds, then?
The mainnet blockchain is incorporated into the newly merged blockchain during a hard fork.All previous data and smart contracts are transferred.An Ethereum hard fork differs from previous forks.
A planned upgrade was the Merge.Exchanges, DeFi protocols, and oracles most likely do not provide the necessary support for an ETHW fork.In my opinion, ETHW, like Bitcoin Cash, will fade into the background of the dominant post-Merge PoS chain.
Related:Federal regulators are getting ready to rule on Ethereum. This kind of fork basically changes the protocol and is meant to be adopted by everyone.To move from ETH (PoW) to ETH 2.0 (PoS), holders of tokens convert ETH to ETH 2.0 in a 1:1 ratio, burning the original ETH.
Advice for investors and traders Investors and businesses should be cautious and create a tax liability provision to prepare for this scenario.You don't want to be in a situation where there is a hard fork and, in the worst case, your Ether loses a lot of value after the merge, making it hard to raise money to pay your crypto tax bill.Keep in mind that only fiat currency can be used to pay this to your tax agency.
