Koinly Explains How The Ethereum Merger Could Affect Your Crypto Treasures – Sponsored Bitcoin News

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The Ethereum merger is shaping up to be the biggest event in the crypto space in over five years, and it could mean some significant ramifications for your crypto portfolio.

We know that sometime between September 10th and 20th, the merger will take place, resulting in the Proof of Stake “Beacon Chain” merging with the current Proof of Work Ethereum chain.

While speculation surrounds whether Ethereum will fork and what might happen to DeFi protocols, stablecoins, NFTs and more, important questions remain surrounding the potential tax implications that Ethereum holders may incur.

So what’s going on and what do you need to know? Crypto tax calculator Koinly is here to explain.

What is the Ethereum Merger?

The final result of the Ethereum merger will be the transition from Proof of Work (PoW) to Proof of Stake (PoS) as the consensus mechanism for the Ethereum blockchain. Ethereum developers have been flagging this move for years, with work starting as far back as 2016.

The current estimate is that the merger will happen between September 13th and 15th, but it will ultimately depend on the Terminal Total Difficulty (TTD) of Ethereum. Currently, this appears to be around a block height of 15,540,293. The last upgrade to Ethereum clients (known as the Bellatrix upgrade) occurred on September 6, with approximately 74% of Ethereum nodes “Merge ready”.

The Ethereum Foundation has stated that by moving to PoS, the blockchain will reduce energy consumption at approximately 99.95% – potentially generating interest from ESG investors who have been sidelined by the high energy consumption of blockchains.

After the merger, Ethereum will join the likes of Binance Smart Chain (BNB), Cardano (ADA), and Solana (SOL) as some of the other cryptocurrencies that use PoS as their consensus mechanism.

Ethereum Merger Taxes

With the merger likely to take place in the next few weeks of September, the timing puts it in the middle of tax season for several countries (and towards the end of the financial year for others).

The timing will be important in the scenario that Ethereum ends up forking. For example, if the Ethereum network experiences a hard fork, some jurisdictions may treat this as “income”, similar to an airdrop. In this case, crypto investors will have to pay income tax on any additional tokens received.

Koinly’s Australian Head of Tax, Danny Talwar, explains, “One of the reasons there has been so much speculation surrounding the merger is the tax implications if the network hard forks. In a scenario where a hard fork occurs, it could be a taxable event. However, this depends on where you live.”

For example, ETHW (which represents the current Proof of Work Ethereum consensus mechanism) may continue to be supported by some miners after the merger. In this scenario, all holders of Ethereum – who will have moved to the PoS chain, will also have 1:1 ETH tokens on a PoW chain.

It is important to remember that many platforms do not officially support the PoW version of Ethereum. However, DeFi protocols, stablecoins and oracles will only recognize the PoS chain as the true version of Ethereum.

Circle has stated publicly there would be no value for USDC stablecoin tokens on an ETHW chain. Chainlink also said it would stop updating price oracles on ETHW, which causes most DeFi and other trading platforms to break without reliable price feeds. Opensea followed suitwith NFTs (representing ownership on the blockchain) only officially recognized on the PoS version of ETH after the merger.

However, the tax implications of the merger do not depend on whether the chain splits into a PoW and PoS version. As Ethereum moves from mining to staking, different countries will have different tax treatments.

Ethereum stake vs mining tax

Once Ethereum moves to a PoS consensus mechanism, anyone who wants 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 get involved via staking instead of mining.

However, taxes will depend on where you live and tax treatment of striking vs. mining in your jurisdiction:

In the United States, crypto mining and staking are subject to income tax. However, the tax treatment of striking has been controversial, with a recent lawsuit against the tax authorities of two American taxpayers claiming tax on input should be reviewed. Currently, contribution rewards are assumed to be taxed as income on receipt and subject to capital gains tax on disposal.

In Canada, the scale of your mining will affect the tax you may have to pay. Individuals and hobby miners do not currently have to pay income tax. However, they must pay capital gains tax (CGT) when they dispose of mining rewards. The CRA has not yet provided clarity on effort as income. However, input under PoS is likely to be treated as income, meaning you are likely to pay both income tax on receipt and CGT on disposal.

In Australia, The taxation of new crypto-assets generated through mining depends on whether you are a hobby miner or operating as a business or trader. Although hobby mining will not result in income tax, staking ETH for rewards or returns probably will. Again, CGT is due on mining or stake rewards on disposal.

In Great Britain, Koinly’s UK Head of Tax, Tony Dhanjal, says: “ETH stakes and mining are generally miscellaneous income and subject to income tax on receipt and CGT on disposal. However, this depends on the degree of activity, organisation, risk and commerciality.”

So, with Ethereum moving to a PoS consensus mechanism, staking ETH will be far more accessible to the average crypto investor. However, there are likely to be more cases where rewards and returns generated from efforts will be seen as taxable income.

Use Koinly to simplify your crypto taxes after the Ethereum merger

Considering the many scenarios that could happen after the Ethereum merger, it will be more important than ever to keep track of where your ETH and other crypto holdings are.

Crypto taxes can be confusing. Luckily, crypto tax calculator Koinly already has the tools you need to take control of your crypto portfolio and track your crypto treasures.

All you need to do is import your ETH transactions from any crypto wallet or exchange to Koinly. You can do this via CSV file or API integration for most platforms and your public wallet address for wallets like MetaMask. Once your data is imported, Koinly uses smart AI to flag different transactions automatically – including forks.

Koinly also supports NFTs, DeFi, airdrops and more. 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 tax consultants.

About Koinly: Koinly calculates your crypto taxes for you, catering to investors and traders of all levels. Whether it’s crypto, DeFi or NFT, the platform helps you save valuable time by reconciling your holdings to generate a crypto tax report in minutes. Sign up Today.

Disclaimer: Koinly is not a financial advisor. You should consider seeking independent legal, financial, tax or other advice to check how this information relates to your unique circumstances.

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