Tax time for ethereum (ETH) holders who don’t play their cards right after the Ethereum merger comes with a hefty bill, according to tax experts.
Around September 15, the Ethereum blockchain is expected to switch from its current consensus mechanism similar to Proof of Work (PoW) to a mechanism similar to Proof of Stake (PoS), which aims to influence the network on improving the network. environment.
The merger may result in a controversial hard fork, resulting in ETH holders receiving duplicate units of ether tokens, similar to what happened during the Ethereum and Ethereum Classic hard forks in 2016.
Head of government solutions at tax compliance firm TaxBit, Miles Fuller, told Cointelegraph that the merger raises interesting tax implications in the event of a hard fork, saying:
The biggest question for tax purposes is whether the merger will result in a hard fork splitting the blockchain.
“If it doesn’t, there’s really no tax implications,” Fuller explained, noting that the current PoW-based ETH is the new PoS-based ETH, “and everything will go around the world on its way”.
However, if a hard fork occurs, i.e. ETH holders receive duplicate PoW tokens, it may result in a “variation of tax impact”, depending on the quality of support. the fork.
As for ETH held in user-owned blockchain wallets, Fuller says the IRS guidelines state that any new PoW-based ETH token will be considered revenue and will be valued at the time the user came into possession of the tokens .
Fuller explained that the situation could be different for ETH held in custodial wallets, such as exchanges, depending on whether the platform decides to support the hard-forked PoW blockchain or not, noting:
“The way forks are handled by maintainers and exchanges is usually covered in your account agreement, so if you’re not sure, you should do some research.”
“If the custodian or exchange does not support the forked blockchain, then you probably have no income (and you may have lost a bonus). You can avoid this by moving your holdings to a non-hosted wallet before the merge to make sure you get all the signals that could lead to a possible fork of the blockchain,” he explained.
PoW token performance could also affect the potential tax bill, according to an Aug. 31 Twitter post from CoinLedger Chief Strategy Officer Miles Brooks.
“If the value of the properties drops significantly after the POW fork (and after you gain control of them) – which is likely – you could pay a tax bill but it may not be much you have assets to pay it.”
Brooks suggested that it may be in the investor’s interest to sell some of the tokens after receiving the forked cryptocurrency, which could ensure that the tax bill is at least covered.
7/ What can you do to prepare? If an ETH PoW fork happens, you’ll want to know if you’re eligible for the fork, as it might be in your best interest to sell some of these tokens when they’re received to make sure you have enough to spare for the fork. tax bill!
—CoinLedger (@CoinLedger) August 30, 2022
7/ What can you do to prepare yourself? If an ETH PoW fork happens, you will want to know if you are eligible for the fork, as it may be in your best interest to sell some of these tokens when received to ensure you have enough funds for the related tax bill. !— CoinLedger (@CoinLedger) August 30, 2022
Ether miners and some exchanges are pushing more to do a PoW hard fork, because without a hard fork, these miners will have to switch to another PoW based cryptocurrency.
Vitalik Buterin suggested at the 5th Ethereum Community Conference held in July that these miners could return to Ethereum Classic instead.
Also read: 3 Reasons Ethereum PoW Tokens Won’t Be In Demand
Contrary to what the related CoinLedger article suggests, the post-merged ether will not be called ETH 2.0, but simply ETH or ETHS, and any token resulting from a potential fork will be called ETHW.
Cryptocurrency investors should be wary of any signal that claims ETH 2.0 is post-merger.
Cryptocurrency Exchange Poloniex, which claims to be the first to support both Ether and Ethereum Classic, has supported a hard fork, and has already added ETHW listing.
Cryptocurrency exchange Bybit told Cointelegraph that Bybit’s risk management and security teams have criteria in place to determine whether a PoW token would be listed on their platform in the event of a token imposition.
Bybit says that exchanges that already list ETHW tokens prioritize profits over user security, and warns traders against transferring their ETH to exchanges that support PoW tokens due to volatility and security risks.
“We warn traders that potential Ethereum PoW forks may be highly volatile and lead to increased security risks. Exchanges that already list tokens for potential PoW forks prioritize profits over user security.”
