Ethereum’s (ETH) transition to a PoS (Proof-of-Stake) model, although historic, might create some tax implications for holders. To better understand, why an additional surprise tax is a real possibility, let’s go back to 2017 during the Bitcoin civil war.
The Bitcoin war led to the creation of Bitcoin Cash (BCH). BTC holders received fresh BCH coins, which resulted in taxable income at the fair market value. Additionally, if any BCH holders later sold their coins, all profits or losses would be taxed as capital gains.
Although there is no war between the two factions in Ethereum (PoW and PoS), things aren’t all that dandy. Some ETH miners might continue to support the PoW model. Moreover, ETH holders began receiving the new ETHW token, even if they did not want it. Now, there is a possibility that the airdropped tokens could have a tax obligation attached to them, just like BCH.
Nonetheless, the tax implications might be different based on where a holder lives. The IRS (Internal Revenue Service) in the US hasn’t provided any explicit advice on the Merge. However, the IRS has a clear policy about ETH holders who receive an equivalent ETHW airdrop being subject to income tax.
On the other hand, things are a little different in the UK (United Kingdom). Under section 43 of the Taxation of Chargeable Gains Act 1992, the Ethereum merger did not create a taxable event subject to capital gains tax. In addition, HM Revenue and Customs have offered some advice on what it refers to as a one-way transfer.
Are Mining and Staking taxed as well?
After the Merge, crypto mining and staking are both taxable to U.S. holders as income upon receipt and capital gains (CGT) upon disposition. Staking, however, is a debatable issue that is the subject of an ongoing legal dispute. As the case develops, there might be further changes in the future.
In the U.K, earnings for ETH mining and staking are typically considered miscellaneous income (minus certain permissible expenditures) and are taxed both when they are received and when they are sold. Although, the level of activity, organization, risk, and commerciality all play a role.
Whales are hoarding Ethereum
A possibility of a surprise tax is not stopping whales from gobbling up ETH. According to Santiment, ETH billionaire addresses holding more than 1 million tokens have collectively increased their holdings by 3.5 million more tokens. The analysis firm pointed out that there are 132 such addresses.
Regardless, ETH has struggled to perform in the price charts. The second largest crypto by market cap fell below the $1.3k mark. At press time, ETH was trading at $1,280.88, down by 2% in the last 24 hours.