Ethereum’s highly anticipated Merge is not here but is already causing trouble for investors. The Merge is an upgrade that will give ETH the much-needed facelift after years of delays. This development will convert Ethereum from a Proof-of-Work (POW) to Proof-of-Stake (POS), but the miners who are the network’s backbone were going to create a problem for Ether holders.
Merge: It’s a taxable event
The shift of the Ethereum blockchain from POW to POS will be an important event. Still, the miners will likely put up a fight, which will cause ETH to split into two chains, a PoW supported by miners and PoS, which will receive a majority vote from investors and the Ethereum foundation.
However, based on the US watchdogs and their regulations, the Merge is supposed to be a nontaxable event as long as no new tokens are created. However, US Ethereum investors will face problems since the chances of a contentious fork due to miners are high.
As a result, the holders of Ethereum will automatically be airdropped with a new coin, which will be taxable based on the existing laws.
CoinLedger, a popular crypto tax software, recently tweeted that the Merge will likely be a taxable event. It further added,
“But if the potential ETH PoW fork is successful, there will be a new token, which will create income for anybody that gets control over the newly forked ETH PoW tokens. The amount of income to pick up if this happens is the fair market value of the tokens the moment you have control over those tokens”
Double trouble, but here’s the solution
While the Merge is already a problem for US investors, it will grow in size, especially if the forked coin that is airdropped loses its value. In that case, investors will likely have to put extra funds to fend off the resulting taxes.
The solution for this multiplying problem is simple if the investors are eligible for a hard fork, the best thing to do is sell their airdropped PoW token and prepare for the tax day. However, a risky bet is to assess if the PoW token will rise in value, in which case, holding the tokens would help.