Ethereum Merge might cause a big tax bill for investors, according to tax experts. These experts said if hodlers do not play their cards well, they may face a significant tax change after the much anticipated ETH event.
The Ethereum blockchain is slated to migrate from its current proof-of-work (PoW) consensus method to proof-of-stake (PoS) around September 15, with the goal of reducing the network’s environmental effect.
There is a potential that The Merge will create a controversial hard fork, causing ETH holders to get duplicate units of hard-forked Ethereum tokens, similar to what happened in 2016 when the Ethereum and Ethereum Classic hard forks occurred. Ethereum Merge might cause a big tax bill if this happens.
Miles Fuller, Head of Government Solutions at tax compliance service TaxBit, stated that the Merge poses some fascinating tax concerns in the event of a hard fork, stating:
“The biggest question for tax purposes is whether the Merge will result in a chain-splitting hard fork.”
“If it doesn’t, then there are really no tax implications,” explained Fuller, noting that the current PoW ETH will just become the new PoS ETH “and everyone goes on their merry way.”
However, if a hard fork happens, resulting in ETH holders receiving duplicate PoW tokens, a “range of tax consequences may result” depending on how widely backed the PoW ETH chain is and where the ETH is held when the fork occurs.
Fuller cites IRS guidelines for ETH kept in user-owned on-chain wallets, noting that any additional PoW ETH tokens would be considered income and valued at the time the user came into control of the tokens.
Fuller clarified that the position for ETH kept in custodial wallets, such as exchanges, may alter depending on whether the platform decides to accept the forked PoW ETH chain, noting:
“How custodians and exchanges handle forks is generally covered in your account agreement, so if you are not sure, you should read up.”
“If the custodian or exchange does not support the forked chain, then you likely don’t have any income (and may have missed out on a freebie). You can avoid this by moving your holdings to an unhosted wallet pre-Merge to ensure you get any coins (or tokens) resulting from a possible chain-splitting fork,” he explained.
According to CoinLedger Director of Strategy Miles Brooks’ Aug. 31 Twitter tweet, the success of the PoW coin can also affect the possible tax bill.
“If the value of the tokens goes down severely subsequent to the PoW fork (and after you have control over them) — which could be likely — you may have a tax bill to pay but potentially not enough assets to pay it.”
Brooks stated that it could be in an investor’s best interests to sell some of the tokens after getting the split currency, ensuring that at least the tax cost is covered.
7/ What can you do to prepare? If a ETH PoW fork does happen, you’re going to want to know if you’re eligible for the fork, because it may be in your best interest to sell some of these tokens when received to make sure you have enough for the associated tax bill!
— CoinLedger (@CoinLedger) August 30, 2022
Ethereum miners and several exchanges have been pushing for a PoW hard fork to occur since, without one, these miners will be forced to switch to another PoW coin.
At the 5th Ethereum Community Conference in July, Vitalik Buterin urged that these miners return to Ethereum Classic.
Read the latest Ethereum news.
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