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Ethereum Merge Crypto Tax Guide

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Ethereum Merge Crypto Tax Guide

Last updated: Tuesday, 20 September 2022

The Ethereum Merge was executed successfully on September 15th, heralding a new era of Ethereum as a Proof of Stake blockchain and ending its days as an energy-intensive Proof of Work blockchain. But what will be the impact of the Merge on crypto tax?

What does the Merge mean for your taxes?

  • The Merge took place on 15 September 2022. However the Merge also produced a split, or fork, as there are some exchanges and Ethereum miners currently maintaining a PoW Ethereum blockchain (ETHW).
  • This means some users may have received no new tokens as a result of the Merge, like if you held your ETH in a non-custodial ETH wallet or hardware wallet.
  • However, users who held their ETH on exchanges like Binance, FTX, ByBit and Kraken may have received ETHW in an airdrop, also known as a token distribution. This may be a taxable event in some countries, like the US, as it could be considered additional income and therefore subject to Income Tax. In many other countries, like Australia, the UK and Canada - it is likely this event would not trigger a taxable event.
  • Income Tax isn't the only tax that will apply to ETHW tokens. If you received tokens and you want to dispose of them via selling for fiat or swapping for crypto, this triggers a Capital Gains Tax event and you'll need to pay Capital Gains Tax on any profit as a result of the transaction.
  • For any miners maintaining the ETHW blockchain, you'll generally need to pay Income Tax on mined coins based on the fair market value on receipt, as well as Capital Gains Tax on any gains if you later sell, swap, spend or gift mined coins.
  • There are some exceptions to the Income Tax implications depending on whether you're a hobby miner and where you live, for example, Canada and Australia do not charge hobby miners Income Tax upon receipt, only Capital Gains Tax on disposal.
  • For those staking ETH, the tax implications are largely the same as mining crypto. You'll generally pay Income Tax on staking rewards upon receipt, as well as Capital Gains Tax on any profits if you later sell, swap, spend or gift staking rewards.

With the summary out the way, let's dive into the details.

The Ethereum Merge Timeline

  • September 15, 2022: The Merge is successful. Ethereum is now a Proof of Stake blockchain.
  • September 6, 2022: Ethereum’s final upgrade - Bellatrix, is successful just nine days out from The Merge.
  • August 10, 2022: Goerli public testnet merge is completed. This is the final trial for Ethereum before moving from PoW to PoS.
  • December 1, 2020: Ethereum’s Beacon Chain is launched as a separate blockchain to the Mainnet, running in parallel. This is referred to as ETH2, while the Ethereum Mainnet is called ETH1.

What is the Ethereum Merge?

What is the Ethereum merge?

The Merge is exactly that - 2 blockchains joining up as one. The Ethereum Foundation tells us that during The Merge, the Ethereum Mainnet (the current blockchain) will merge with the Proof of Stake (PoS) Beacon Chain, marking the end of Proof of Work (PoW) as the consensus mechanism for the Ethereum blockchain.

One immediate bonus from the Ethereum Merge moving from PoW to PoS will be an approximate 99.95% reduction in the blockchain’s energy consumption.

Carbon friendly eth merge

Whether Ethereum will see continued support for its Proof of Work version of the network remains to be seen. However, some exchanges, including FTX, Kraken, and ByBit distributed ETHW (Ethereum Proof of Work) tokens to those who held ETH on these exchanges at the time of The Merge.

Since merged with the Beacon Chain, Ethereum has joined ranks with other major PoS cryptocurrencies such as Binance Smart Chain (BSC), Cardano (ADA), and Solana (SOL).

As the second largest crypto after Bitcoin, and the chain that effectively launched both NFTs and DeFi, the Ethereum Merge will shake up the entire crypto space in one of the most significant moves of the last five years with immediate impacts.

In the lead up to the Merge, the Koinly team weighed up the possibilities. At this time Danny Talwar, Head of Tax at Koinly Australia, said, “The tax consequences of the ETH Merge are potentially significant, although guidance from tax authorities is limited - which is why we're looking at the different potential scenarios from the Merge and what it means.”

“One area of interest is whether there is a fork of the original PoW Ethereum blockchain. From the perspective of Ethereum developers, the Merge will see the whole Ethereum network transition with there being no change to the Ethereum token.”

We’re glad Danny gave us the heads-up. While there wasn’t necessarily a fork of the PoW (although the PoS chain technically was a fork), some exchanges have had “token distributions” of ETHW, which represents PoW ETH tokens.

This was anticipatory, and not all exchanges have done this - so it’s best to check to see if you had any ETH hiding away on exchanges such as  FTX, Kraken, and ByBit as you may have some new ETHW tokens waiting for you.

Why Proof of Stake?

This was by no means a rushed decision. Vitalik Buterin originally envisaged Proof of Stake to be the consensus mechanism of Ethereum, according to his whitepaper published in 2013. However, he noted in 2014 that the development of a PoS was “so non-trivial that some even consider it impossible”.

Ethereum saw work on its move to a PoS begin during 2016, with Buterin posting his philosophy as to why he believed Proof of Stake as a design would be the superior method for ensuring the security of the network.

pos crypto

Ethereum Merge date

So, when did the Ethereum Merge take place?

The ETH Merge date was originally estimated to be completed in Q3 or Q4 2022. Ethereum developers targeted September 15th as the Merge date and ultimately were bang on.

The date of the Ethereum Merge had been delayed before, with numerous false starts dating back as far as 2017. So while developers were indicating green lights, it wouldn’t have been surprising if there was another delay.

The Merge’s timing, however, may have been important for crypto taxes, explained Michelle Legge, Head of Tax Education at Koinly, “With multiple countries currently in the middle of their tax seasons and many more about to hit the end of their financial year, the date on which the Merge takes place could significantly affect the tax positions of crypto investors over the next two financial years at least.”

wen merge?

Let’s talk about the potential fork

While most of the attention around the Ethereum Merge was the move to a PoS blockchain, there was speculation that Ethereum miners may continue to mine more blocks on the current chain, possibly leading to a fork.

This potential “forked” version of Ethereum, “ETHW”, stands for Proof of Work Ethereum. ETHW could be a “hard fork” from the main ETH chain, where both chains are separately maintained by different developers.

While there is currently little support for the PoW chain (hashrate has already dropped 50% after an initial rise), it appears that some exchanges are offering trading for the ETHW token.

However, it’s important to remember that not every exchange is supporting ETHW, so check out if you have received these tokens, as there may be tax implications if you find some ETHW now sitting in your account.

soft fork vs hard fork

Ethereum Merge Taxes

First and foremost -  the direct  tax implications of The Merge hinged on whether ETH experienced a hard fork or soft fork.

Danny Talwar explained, “One of the reasons there had been so much speculation surrounding the Merge is the tax implications if the network forks. In a scenario where a hard fork occurs, there may be a taxable event. However, this depends on where you live.”

Reflecting on Ethereum Merge tax implications in the US, Tony Dhanjal added, “The IRS has not issued any guidance as yet and whether they are likely to before the end of the tax year on 31 December,  is uncertain, to say the least.”

“However, the IRS offers clear guidance when it comes to hard forks, and that is - if an investor receives an airdrop of new coins following a hard fork, then they have taxable income.”

Both of Koinly’s Heads of Tax were spot on with their guidance - and this will be handy if you’re now holding some ETHW tokens. The exact tax implications depend on where you live, but if you’ve received ETHW, you likely have to pay some tax in some way, shape or form.

In Canada, the CRA hasn’t yet issued any specific guidance on the tax consequences of hard forks. 

Senior Tax Researcher at Koinly, Natasha Hopgood explains, “The CRA tax treatment on a hard fork largely depends on whether you’re viewed as an individual investor or conducting business activities. In Canada, if you're viewed as an individual investor, it’s unlikely you’ll have to pay Income Tax for any crypto you receive as a result of a hard fork. However, under the adjusted cost basis method, the cost basis for any new coins you receive from the fork may be zero, meaning the full market value at the point of a disposition would be taxable.”

Similarly, for those in Australia, if you're an investor, there will be no tax on ordinary income upon receipt. However, you will need to pay tax on any capital gains when disposing of any new ETH tokens received (and a cost basis of zero). 

“Where new tokens are received as a result of a fork, investors will have to front up on disposal. Unlike many other jurisdictions, the ATO suggests that the cost basis of the new tokens is zero, implying that the full market value at the time of disposal is taxable as capital gains,” he continued.

And what about crypto taxes in the UK? Tony Dhanjal stated,  “HMRC will treat any forked tokens as income, and thus you’ll need to pay Income Tax under the miscellaneous income sweep-up provision. Capital Gains Tax will also be due when the tokens are disposed of. There is also a specific rule in the UK on the cost basis from a fork - as it is derived from your existing tokens from the previous blockchain and not the market value of the forked coin on the day you received it.”

He goes on to add, “HMRC in the UK has provided limited guidance on one-way transfers - citing Ethereum Mainnet to Beacon Chain as a one-way transfer example. Their view is that section 43 of The Capital Gains Act 1992 will apply to this scenario - simply put, a taxable event is not triggered at the point of the Merge - instead, the cost basis of your ETH1.0 is attributed to your ETH2.0 token, and any subsequent disposals will accrue a gain or loss as normal.”

Eth merge taxes

What happened to Ethereum after the Merge?

Even if ETHW is supported by Ethereum miners, it won’t be supported by most DeFi protocols, stablecoins and oracles. Circle (the company behind the USDC stablecoin) have publicly stated that USDC would not be supported on ETHW following the Ethereum Merge.

Chainlink revealed that their oracles (which update token prices across major DeFi platforms) will only support the PoS Ethereum chain, leaving ETHW without reliable price feeds.

New blocks will be created via staking rather than mining, requiring individuals (or entities) to set up their own pool. This requires 32 ETH - which may not be feasible for most. However, crypto investors are able to delegate their ETH to centralized platforms, including Coinbase, Binance, Kraken and Lido.

ETH staking vs mining taxes

Following the Ethereum Merge, the tax implications of staking (rather than mining) will depend on where you live.

staking taxes

For those in the US - crypto mining and staking are both subject to Income Tax upon receipt and CGT upon disposal. However, staking is a contentious topic and is currently subject to an ongoing court case, so this may be set to change in the future as the case proceeds.

In Canada, the tax you’ll pay depends on the scale of your mining activities and your intentions. While individuals and hobby miners do not have to pay Income Tax upon receipt for mining, they do pay Capital Gains Tax upon disposal. However, if your mining activities are viewed as business income, you’ll be liable for Income Tax upon receipt

However, when it comes to staking, the CRA will likely view any PoS rewards as earnings, resulting in the need to pay Income Tax upon receipt of any ETH staking rewards -  based on the fair market value of tokens upon receipt.

In the UK, Tony Dhanjal says, “ETH staking and mining are generally miscellaneous income and subject to Income Tax upon receipt and CGT on disposal. However, this depends on the degree of activity, organisation, risk and commerciality.”

Finally, for Australian crypto investors, taxes on crypto mining depends on whether you're a hobby miner or trader. There is no Income Tax for hobby miners, as rewards are viewed as a capital acquisition - however, investors will need to pay Capital Gains Tax if they dispose of their mined coins by selling, swapping, spending or gifting them. 

If you're a trader - aka a business, then proceeds will be taxed as ordinary income. However, you may be eligible to deduct allowable expenses. Whether you'll be viewed as a hobby miner or trader by the ATO depends on a number of factors, including whether you conduct operations in a ‘business-like’ manner. When it comes to staking, however, it’s likely that the ATO will consider this as additional income and as such, investors will need to pay Income Tax upon receipt, as well as having Capital Gains obligations upon disposal.

hobby mining vs trader

If you're a trader - aka a business, then proceeds will be taxed as ordinary income. However, you may be eligible to deduct allowable expenses. Whether you'll be viewed as a hobby miner or trader by the ATO depends on a number of factors, including whether you conduct operations in a ‘business-like’ manner. When it comes to staking, however, it’s likely that the ATO will consider this as additional income and as such, investors will need to pay Income Tax upon receipt, as well as having Capital Gains obligations upon disposal.

staking vs mining taxes

So, did the ETH Merge result in a hard fork?

Liam Thomson, Koinly’s Australian Content Manager, earlier predicted, “Based on history, we’ve seen hard forks happen on the Bitcoin blockchain. These were the result of disagreements between miners, developers and the community around the size of Bitcoin blocks, with “big blockers” wanting to increase Bitcoin block size higher than the 1MB limit.”

“This resulted in both BCH (Bitcoin Cash) forking from BTC (Bitcoin) and, subsequently, BSV (Bitcoin SV) forking from the BCH chain. Depending on which country you live in, this meant that the forked BCH and BSV tokens may have resulted in your local tax office recognizing this as additional income, leading to Income Tax”, he continued.

While both these Bitcoin hard forks didn’t prevail as the main Bitcoin blockchain, following the DAO hack on the Ethereum blockchain in 2016, a hard fork split the network into two competing chains.

Ethereum Classic (ETC) stayed true to the original code, while Ethereum reverted the blockchain so that over $100m was returned due to a bug in the original codebase. The result was a hard fork away from the “original” chain, where the forked version (ETH) became the prevailing version of Ethereum.

Liam Thomson, Koinly’s Australian Content Manager believed this may have happened again, with the Ethereum Merge likely causing another hard fork away from the current version of Ethereum to the PoS chain.

“It looks like ETHW will be supported by some of the current Ethereum miners. This could be a repeat of the ETH split away from ETH back in 2016, with ETHW continuing with the current codebase and ETH forking to the new PoS chain,” he said.

Liam O’Hagan, Koinly’s Social Media Lead, kept tabs on Crypto Twitter and believed that the Ethereum blockchain wouldn’t fork. 

“I don’t think that Ethereum will result in a hard fork because ETH will remain the currency on the blockchain. Plus, with the current blockchain becoming part of the new blockchain and all smart contracts moving over, along with all the previous data - it’s unlike classic hard forks we’ve seen before,” he said.

Both Liam's were close to the mark, with a fork not really happening, but ETHW also seeing some initial interest and support. However, it seems that support for a PoW Ethereum blockchain is already dwindling less than a week after The Merge.

While certain exchanges have markets open for ETHW trading, depending on the volume this may be discontinued at some point in the future.

hard fork and your taxes

How Koinly can help with crypto taxes after the Ethereum Merge

Crypto tax calculator Koinly is always one step ahead. 

As Head of Product, Aimee Ruddy explains, “Koinly is built to be flexible.  All you need to do is import all of your ETH transactions from your various crypto wallets and exchanges, into Koinly. You can do this via CSV file or through API integration for most platforms.”

“Once your data is imported, Koinly uses smart AI to automatically tag different transactions - including forks. However, if your data happens to be missing this information, you can easily tag individual transactions in Koinly manually. Just find the transaction in our platform and use the three dots on the right-hand side to tag it as a fork.”

fork tag on koinly

Senior Tax Researcher at Koinly, Natasha Hopgood adds, “For users in countries where coins as a result of a hard fork are considered income, you can also head into your settings to turn the “treat forks as income” option on.

And if you’re staking ETH - Koinly can also help you identify the fair market value of any rewards in your local currency on the day you received them so you can easily calculate any income from crypto to report to your tax office.”

Once your transactions are tagged, and your settings are correct for your location, Koinly will calculate your crypto taxes, including any capital gains from forks and any income from forks. You can find an easy-to-read summary on your tax reports page and specific tax reports to download and use when it’s time to file your taxes.

fork settings on koinly

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