The Ethereum merger is expected to be the most significant event in crypto in more than five years. This could have significant implications for your portfolio.
The Merge will occur sometime between September 10th-20th. This will result in the Proof of Stake "Beacon Chain", merging with the existing Proof of Work Ethereum chain
Although speculation is swirling about whether Ethereum will fork, and what might happen to DeFi protocols and stablecoins as well as NFTs, there are still important questions around potential tax consequences that Ethereum holders may face.
What's the situation? And what should you do to find out more? Koinly, the crypto tax calculator, is here to help.
What's the Ethereum Merge?
The final result of the Ethereum merger will be the change from Proof of Work to Proof of Stake as the consensus mechanism for 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 ultimately depend upon the Terminal Total Difficulty of Ethereum. This block height currently stands at 15,540,293. On September 6, approximately 74% of Ethereum clients were upgraded to "Merge Ready span>"
The Ethereum Foundation stated that moving to PoS will lower its energy consumption of approximately 99.95%. This could potentially attract interest from ESG investors, who have been left behind by the high energy use of blockchains.
Ethereum will be joining the likes Binance Smart Chain (BNB), Cardano(ADA) and Solana, (SOL), as cryptocurrencies that use PoS for their consensus mechanism.
Ethereum Severe Taxes
The Merge is likely to take place in the middle of tax season for many countries, and towards the end for others.
In the event that Ethereum forks, timing is crucial. Some jurisdictions could treat an Ethereum network hard fork as income, similar to an airdrop. Crypto investors would be subject to income tax on additional tokens they receive in this instance.
Danny Talwar (Australian Head of Tax at Koinly) explains that there have been so many speculations about the Merge because of the tax implications if the network forks. A hard fork can be considered taxable in certain situations. This is dependent on where you live.
ETHW, which represents the current Proof of Work Ethereum consensus mechanism, may be continued to be supported after the Merge. This scenario will see all Ethereum holders, which will be moved to the PoS chains, also holding 1:1 ETH tokens on a PoWchain.
Many platforms will not officially support the PoW version. DeFi protocols and stablecoins, as well as oracles, will recognize the PoS version of Ethereum.
Circle stated publicly that USDC stablecoin tokens will not be worth anything on the ETHW chain. Chainlink also stated that they would cease updating price oracles for ETHW. This will cause most DeFi and other trading platforms to stop receiving reliable price feeds. Opensea also followed Chainlink's lead, with NFTs (representing ownership in the blockchain) being officially recognized only on the PoS version ETH after the merger.
The tax implications of Merge do not depend on whether the chain is split into a PoW or PoS version. Different tax treatment will apply to different countries as Ethereum moves from mining to stake.
Ethereum Staking vs Mining Taxes
When Ethereum is moved to a PoS consensus mechanism everyone who wants to contribute to it will need to delegate their Ethereum via a pool. This opens up the possibility of more crypto investors being involved via staking than mining.
Taxes will vary depending on where you live, and the tax treatment for staking against mining in your jurisdiction.
Crypto mining and staking in the US are subject to Income tax. The tax treatment of staking is controversial. Two taxpayers from the US sued the IRS in a court case. They claimed that tax on staking should not be allowed. Staking rewards are currently treated as income and subject to Capital Gains Tax after disposal.
The tax you pay in Canada will depend on the size of your mining operations. Individuals and hobby miners don't have to pay Income Tax. They must however pay Capital Gains Tax when they dispose off mining rewards. The CRA has yet to clarify whether staking is considered income. PoS will be considered earnings, so you will need to pay both Income tax on receipt and CGT upon disposal.
The taxation of crypto assets that are generated by mining in Australia depends on whether you are a hobby miner, trader, or businessman. While hobby mining will not result in income tax, staking ETH to earn rewards or yield is likely to. CGT is due for any mining or staking reward.
Tony Dhanjal, Koinly's UK Head for Tax, states that ETH staking or mining are miscellaneous income, and subject to Income tax upon receipt, and CGT upon disposal. This depends on the level of activity, organization, risk, and commerciality.
With Ethereum moving to a PoS consensus system, staking ETH is now much easier for the average crypto investor. There will likely be more situations where the income generated by staking can be considered income subject to tax.
Koinly can help you simplify your crypto tax after the Ethereum Merge
With the many possible outcomes of the Ethereum Merge it is vital to track where your ETH and crypto holdings are.
Crypto tax can be confusing. Crypto tax calculator Koinly has all the tools that you need to manage your crypto portfolio and track crypto taxes.
You can import your ETH transactions directly from any cryptocurrency wallets or exchanges to Koinly. This can be done via API integration or CSV file for most platforms, and your public address for wallets like MetaMask. Koinly smart AI uses your data to automatically tag transactions, including forks, once it has been imported.
Koinly supports NFTs and DeFi as well as airdrops. Koinly has over 700+ integrations with the most popular exchanges wallets and blockchains. This software can help you and your accountant save tens to hours of manual calculations. It pairs intuitive software and expert guidance from in-house tax experts to make it easy for you and your accountant.
Koinly is a platform that calculates crypto taxes and caters to traders and investors at all levels. The platform allows you to save time and generate a cryptocurrency tax report in just minutes, regardless of whether it's DeFi, crypto or NFTs. Register today.
https://koinly.io
Disclaimer: Koinly does not provide financial advice. To determine how this information applies to your particular circumstances, you should seek independent legal, financial and taxation advice.
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By: Media
Title: Koinly Explains How The Ethereum Merge Could Affect Your Crypto Taxes
Sourced From: news.bitcoin.com/koinly-explains-how-the-ethereum-merge-could-affect-your-crypto-taxes/
Published Date: Wed, 07 Sep 2022 11:00:16 +0000
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