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The Ethereum merger is expected to become the largest event in crypto since over five years. It could impact your crypto portfolio in significant ways.
We know that sometime between September 10th and 20th, the Merge will take place, resulting in the Proof of Stake “Beacon Chain” merging with the current Proof of Work Ethereum chain.
Although speculation is swirling about Ethereum’s fork and what will happen to DeFi protocols. NFTs, and other DeFi protocols., the most important question remains around potential tax implications.
So what’s happening, and what do you need to know? Koinly Crypto Tax CalculatorThis is what we are trying to show you.
What exactly is the Ethereum Merge and how does it work?
End result of the Ethereum merger will be the change from Proof of Work to Proof of Stake as the consensus mechanism of the Ethereum blockchain. This move has been a long-standing goal of Ethereum developers. Work began in 2016 and was completed by 2016.
The Merge is expected to take place between September 13th-15th according to the current estimates. However, it will depend on the Terminal Total Difficulty of Ethereum. At the moment, it appears that this will be at a block height around 15,540,000.293. The final upgrade to Ethereum clients (known as the Bellatrix upgrade) occurred on September 6th, with approximately 74% of Ethereum nodes “Merge ready”.
According to The Ethereum Foundation, PoS is the best way for blockchain technology to be used. Reduce its energy consumption by approximately 99.95% – potentially bringing interest from ESG investors who have been sidelined due to the high energy usage of blockchains.
Following the Merge Ethereum will be joining the Binance Smart Chain (BNB), Cardano(ADA), Solana [SOL] as other cryptocurrencies which use PoS for their consensus mechanism.
Ethereum Merge taxes
Merge will likely take place during September’s middle tax season. It is expected to be at the close of financial year in some countries.
In the event that Ethereum forks, timing is crucial. For example, if the Ethereum network experiences a hard fork, some jurisdictions may treat this as “income”, similar to an airdrop. This would mean that crypto investors would be subject to income tax for any tokens added.
Koinly’s Australian Head of Tax, Danny Talwar, explains, “One of the reasons there has been so much speculation surrounding the Merge is the tax implications if the network hard forks. If a network hard forks, it may result in a taxable event. However, this depends on where you live.”
ETHW, which represents the Proof of Work Ethereum consensus mechanism, may be continued to be supported after the Merge. In this scenario, all holders of Ethereum – which will have moved to the PoS chain, will also hold 1:1 ETH tokens on a PoW chain.
It’s important to remember that many platforms won’t officially support the PoW version of Ethereum. DeFi protocols, stablecoins, and oracles won’t recognize the PoS blockchain as true Ethereum.
Circle is publicly statingUSDC stablecoin tokens would have no currency on an ETHW-chain. Chainlink said that they would cease updating price oracles in ETHW. Without reliable price feeds, most trading platforms like DeFi will be unable to function properly. Opensea was next.……………… with NFTs, which represent ownership on blockchain. Official recognition of NFTs is only possible on PoS version ETH.
However, the tax implications of the Merge don’t all depend on whether or not the chain splits into a PoW and PoS version. Different tax treatment will apply to different countries as Ethereum moves from mining and staking.
Ethereum Staking and Mining Taxes
Once Ethereum moves to a PoS consensus mechanism, anyone wanting to contribute to the network will be required to delegate their ETH via a staking pool – opening up the possibility for more crypto investors to be involved via staking rather than mining.
Taxes will vary depending on your location and where you live. Staking is subject to taxMining in your area versus other forms of mining
The US is home toIncome Tax is required for crypto mining and stakes. The tax treatment of stakes has been controversial. Recent court case against IRSThe claims of two US taxpayers for tax on stake should be reviewed. Current law states that staking incentives are subject to Capital Gains Tax and tax upon receipt.
In Canada,The tax that you pay will depend on the size of your mining operation. Individuals and hobby miners currently don’t need to pay Income Tax. They must however pay Capital Gains Tax when they receive mining rewards. However, the CRA has yet to clarify whether staking is considered income. PoS will be considered earnings, so you’ll need to pay Income Tax upon receipt as well as CGT at disposal.
Australia the taxation of new crypto assets generated through mining depends on whether you’re a hobby miner or operate as a business or trader. While hobby mining won’t result in Income Tax, staking ETH for rewards or yield likely will. CGT applies to any rewards received from mining or stake.
The United Kingdom Koinly’s UK Head of Tax, 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.”
With Ethereum becoming a PoS consensus system, ETH staking will become much more affordable for the average crypto investor. There will probably be more situations where the income generated by staking is taxable, such as when it comes to rewards or yield.
Koinly will simplify your cryptocurrency taxes following the Ethereum Merge
It is important to know where you ETH and your other crypto assets are in light of the potential scenarios following the Ethereum Merge.
Cryptotaxes can seem confusing. Fortunately, Koinly – Crypto tax calculatorYou already have the tools to track and control your crypto assets.
Simply import your ETH transaction from any cryptocurrency wallets or exchanges into Koinly. For MetaMask wallets, you can import your ETH transactions via CSV or API integration. Once your data is imported, Koinly uses smart AI to tag different transactions automatically – including forks.
Koinly supports NFTs and DeFi as well as airdrops. With over 700+ integrations across the most popular exchanges, wallets and blockchains, Koinly can save you – and your accountant – tens of hours of manual calculations by pairing intuitive software with expert guidance from expert in-house tax consultants.
Koinly Koinly can calculate your crypto taxes and caters to traders of all levels. Whether it’s crypto, DeFi or NFTs, the platform helps you save valuable time by reconciling your holdings to generate a crypto tax report in minutes. Sign up today.
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Disclaimer: Koinly isn’t a financial advisor. To determine how the information applies to you, Koinly is not a financial adviser.
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