Michelle Legge
By Michelle LeggeHead of Crypto Tax Education
Updated Feb 1, 2024
This article has been fact checked and reviewed as per our editorial policy.

The Ethereum Shanghai Upgrade Tax Guide

Also known as the Shapella upgrade, the Ethereum Shanghai upgrade went live on April 12, 2023. But what is the Shanghai update and what does it mean for your taxes?

What is the Shanghai upgrade?

Also known as the Shapella upgrade, The Ethereum Shanghai upgrade is a fork - that went live on April 12, 2023 - and the hype is real. There are quite a few technical changes involved in the Shapella upgrade, but one which has investors’ attention is the Shanghai upgrade will allow stakers and validators to withdraw ETH from the Beacon Chain. It’s an anticipated update following the Ethereum Merge back in September 2022.

The reason the Shanghai upgrade is also known as the Shapella upgrade is because, at the same time implementing the Shanghai upgrade, the network will also implement a number of technical upgrades known as the Capella upgrades on the consensus layer of the network. Overall, the changes include:

  • EIP-4895: This is the upgrade that allows validators to withdraw staked ETH.

  • EIP-3651: Also known as the Warm Coinbase proposal, this upgrade is focused on reducing costs by making block building cheaper, cutting gas fees for participants, and more.

  • EIP-3855: Also known as the PUSH0 instruction, this upgrade optimizes smart contracts by making them smaller and improving the code.

  • EIP-3860: Also known as the limit and meter Initcode, this upgrade hopes to solve the out-of-gas exceptions on Ethereum.

What does the Shanghai upgrade mean for investors?

Once the upgrade is complete, investors will be able to withdraw staked ETH - but with certain limitations. Both validators with 32 ETH or more and delegators who entrusted their funds to validators will be able to withdraw, but they may only withdraw a given amount depending on their circumstances. So let’s break it down. For validators, they can choose to:

  • Make a partial withdrawal: Unstake any rewards accrued over the last few years. This withdraws any amount (including rewards) over 32 ETH to the nominated withdrawal address.

  • Exit the Beacon Chain with full withdrawal: Unstake all 32 ETH and rewards. To do this, validators must leave the active set and this is irreversible. Once requested and verified, rewards and the original stake become withdrawable.

For both partial and full withdrawals, only 16 withdrawable validators will be allowed per block (every 12 seconds). For an exit with full withdrawal, only 7 excitable validators will be allowed per epoch (every 6 minutes). This means while partial withdrawals may happen quite fast, exits with full withdrawals will be quite slow. In other words, due to the anticipated length of the withdrawal queue, it might take investors some time to withdraw their rewards.

As for how much will be withdrawn? Nobody knows. Blockchain data analysts at Glassnode predict that only a total of 170K ETH will be sold after the Shanghai upgrade. Given that 14% of all ETH, amounting to 16 million tokens valued at $26 billion is currently staked, this is a relatively tiny portion.

What will happen to the price of ETH after the Shanghai upgrade?

If you’re panicking about everyone withdrawing their ETH stake at once, selling and the price plummeting - don’t. The withdrawal queue and limitations around withdrawal will supposedly prevent any sudden plunges in price.

On top of this, as Ethereum remains the most popular proof of stake blockchain, it's likely many validators will only conduct a partial withdrawal so they can continue to receive rewards in the future.

However, other market influences may impact the price of Ethereum at this time, so nobody can predict with 100% accuracy what comes next.

What are the tax implications of the Shanghai upgrade?

Your staking rewards are taxable. From the IRS to the ATO, tax offices around the world are generally in agreement that your staking rewards are income and taxed as such. We’ve got a whole guide on crypto staking taxes to check out for more information.

Generally speaking, rewards earned from staked ETH are likely going to be viewed as income from a tax perspective and you’ll pay Income Tax on the fair market value in your fiat currency on the day your rewards are withdrawn. The IRS in particular has released updated guidance clarifying that rewards are taxable when received - for ETH stakers, this means at the point your rewards are unlocked and you have the ability to actually sell or otherwise dispose of your rewards.

If you later go on to sell, trade, or even spend your rewards, this too may be taxable. You’ll pay Capital Gains Tax on any gain you make as a result of these transactions.

As well as this, for those that had staked ETH in a wrapped version of ETH, you’ve likely already triggered a taxable event. Swapping one cryptocurrency for another may be viewed as a crypto to crypto trade and any gain would be subject to Capital Gains Tax, so similarly, swapping wrapped ETH for ETH may be a taxable event and any gain subject to Capital Gains Tax.

How do you report ETH staking rewards?

The IRS hasn’t provided specific guidance on staking rewards yet. However, it is widely accepted by tax professionals that staking is taxable as ordinary income at fair market value when received.

You’ll generally report any rewards from staking as part of your annual tax return. For example, US investors would use Form 1040 Schedule 1 to report income from crypto (or Schedule C for self-employed investors).

However, if you were using a centralized exchange to staked ETH, it might be a little more complicated. Many of these exchanges issue 1099-MISC forms to investors with more than $600 in crypto income, including from staking products.

This said, some exchanges like Coinbase had not previously included rewards from staking ETH (or holding cbETH) as taxable income on form 1099-MISC prior to 2023 as customers were not able to withdraw rewards. So you should look over the exchanges you use, and the tax forms you may have already received, to figure out how best to report your staking rewards.

Read next: How to report your Ethereum gains at tax time

How can Koinly help?

A banner prompting investors to connect Ethereum and Koinly crypto tax calculator

Koinly can help with your Ethereum staking taxes! As a leading crypto tax calculator, Koinly can identify the fair market value of any staking rewards on the day you received them and generate your tax report to include any income from crypto - including staking rewards.

All you need to do is connect your wallets and download your tax report before filing with your tax office or handing your report over to your accountant.

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