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The Tax Implications of the Ethereum Merge

The Ethereum Merge was successfully deployed on September 15. Does it change anything for crypto investors on the taxes side?

Ethereum’s change to a Proof-of-Stake (PoS) mining method affects how tokens are created and the opportunities for investors in the crypto landscape. Amid the Merge, a new fork also occurred called ETHPoW. How does that impact investors?

Let’s discover what tax implications the Ethereum Merge has for crypto investors.

In this article:

What happens to Ethereum after Merge?

With the Merge, Ethereum’s consensus changed from Proof-of-Work (PoW) to Proof-of-Stake (PoS), significantly changing the network’s energy profile, supply dynamics, scale, transaction fees and speed, and more.

The Ethereum Merge is one of the biggest changes in crypto history, with the overall community eager to experience the improved features of the network after the change.

For US taxpayers, let’s evaluate if the Merge has tax implications.

Is the Merge a taxable event?

The Merge changed the consensus of Ethereum, but it didn’t alter investors’ ETH holdings, resulting in no taxable event.

If you bought Ethereum and are holding your coins through the Merge, nothing changed, and if you didn’t sell any of your tokens, you would not have any taxable event.

If you bought ETH before the Merge and sold some of it after the Merge, you’re incurring a taxable event, subject to capital gains taxes, depending on the holding period.

The crypto gains tax can be at a short-term rate (from 10% to 37%) if you held your ETH for 12 months or less, or at a long-term rate (from 0% to 20%) if you held your ETH for over 12 months.

Learn more about taxes on crypto trading.

Is transferring Ethereum a taxable event?

Transferring Ethereum between personal wallets is not a taxable event in the US. You’ll only face a taxable event if you sell any of your ETH.

Learn more about taxes when transferring crypto between wallets.

Is staking ETH a taxable event?

With Ethereum’s shift to Proof-of-Stake, investors will now be able to stake ETH and receive more ETH tokens as a reward, leading to a taxable event in the US.

Crypto staking is a taxable event in the US, where you must recognize the Fair Market Value (FMV) of each staking rewards batch that you receive as income at the time you receive it.

Those FMVs will be reported on your income tax return alongside your other income for the year (including non-crypto income). Learn more about taxation on crypto staking rewards.

Is selling ETH staking rewards taxable?

If you stake ETH, receive staking rewards, and then sell them, you’ll face a taxable event in the US, subject to capital gains taxes.

Let’s imagine you receive $1,000 worth of ETH staking rewards. First, you need to declare those $1,000 as ordinary income on your income tax return.

Let’s assume that you hold those ETH staking rewards for six months, and now they are worth $1,500, and you sell them.

You’ll be taxed on the $500 gain at a capital gains tax level, with a short-term rate ranging from 10% to 37% since you held your ETH rewards for less than 12 months.

Does the Ethereum hard fork, ETHPoW, have tax implications for investors?

Yes, if you received ETHPoW tokens with the Merge, you'll have to calculate their Fair Market Value and report them on your income tax return for the year.

ETHPoW is an Ethereum hard fork from a group of developers that wish to maintain Ethereum as a Proof-of-Work (PoW) network.

Amid the Merge, holders of ETH tokens also received the same amount of ETHPoW tokens in their wallets.

If you claim and hold those new ETHPoW tokens, you have to determine the Fair Market Value (in USD) at the time you receive them and report them as income in your income tax return.

Is selling ETHPoW a taxable event?

Yes, if you claim ETHPoW tokens and then sell them, you’ll be taxed at a capital gains tax rate.

When you receive the new ETHPoW from the hard fork, you should have recognized the FMV of those tokens at that time and reported it as income.

Let’s imagine that FMV was $500. If you hold them for one year and a half and sell them when they are worth $1,000, you’ll have a $500 gain.

You’ll be taxed on the $500 profit at a long-term capital gains tax rate, ranging from 0% to 20%, depending on your personal situation (e.g., filing status).

How to import ETH trades into CoinTracking:

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Do you have any crypto tax questions? Check the best guides:

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This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 35+ AMA crypto tax reports for free.

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.