So, the Ethereum Merge has taken place and you’re probably wondering “How will this impact me & my tax position?”
Well, you’re in the right place, Myna Specialists have come together to create an outline of what the Ethereum Merge really means for you.
Let’s dive in.
What is the Ethereum ‘Merge’?
To put it simply, the merge is an Ethereum upgrade aimed at improving the network. These upgrades are pretty ordinary but one is the most important to date and the overall success of the merge will pave the way for developers to introduce a host of new features to the network.
The merge will merge the current Ethereum mainnet — or the main public Ethereum blockchain used by everyone — with something called the Beacon Chain. Currently, both chains exist in parallel. However, ONLY the Ethereum mainnet, which currently uses a mechanism called proof of work, is processing transactions.
Once the merge is complete, the Ethereum mainnet will shift away from proof of work and instead adopt the Beacon Chain’s proof-of-stake mechanism.
Why is the merge such a big deal?
Ethereum is the most-used blockchain and powers Ether, the second-largest cryptocurrency, with a $200 billion market cap. Ethereum also hosts numerous decentralized applications (dApps) and decentralized finance (DeFi) protocols and establishes the authenticity of millions of non-fungible tokens (NFTs).
This means the outcome of the merge will affect not just the Ethereum blockchain, but a wide range of products and services that rely upon it. Additionally, given Ethereum’s size and influence, the fate of the merge is likely to have a ripple effect on the broader crypto industry.
Meanwhile, the switch to proof of stake will affect thousands of people who mine Ether, many of whom have expended significant capital in the endeavour. Most will probably turn to mining other proof-of-work coins, but the merge is still likely to hurt their bottom line.
But while the merge is bad news for miners, the vast majority of the Ethereum community and beyond see the end of mining as a good thing—helping both the planet and Ethereum’s reputation. The expectation is that the switch from proof of work to proof of stake will reduce overall energy consumption of Ethereum by 99.9% or more.
What happens to my existing ETH?
Nothing and be very wary of anyone telling you otherwise.
The Ethereum Foundation made it very clear by saying:
“As a user or holder of ETH or any other digital asset on Ethereum, as well as non–node-operating stakers, you do not need to do anything with your funds or wallet before the merge…
Any funds held in your wallet before the merge will still be accessible after the merge. No action is required to upgrade on your part.”
What does this mean for my tax and accounting position?
The following highlight what this may mean for your tax and accounting positioning:
Staking ETH2.0 prior to merge:
Any Ethereum locked in staking contracts prior to the merge will be taxed, under current HMRC Guidance in the UK, will be classed as a disposal on entering the staking contract and an acquisition on receipt of the ETH returned post merge. Any interest/staking rewards earned during the staking period will be taxed as miscellaneous income on receipt.
Merge implications:
The main question prior to the merge was, will there be a hard fork or soft fork to the network.
If a soft fork had occured then there would have been no changes to the underlying token and therefore no taxable implications on the investor.
Since the dust has settled we have seen the distribution of a second token named EthreumPoW or ETHW. This has therefore added some complexity to the tax position due to the UK clearly stating that you will need to apportion the value of any ETHW received on a ‘just and reasonable basis.’ The UK doesn’t tax the receipt of these tokens just any future disposal.
Staking post-merge:
Similarly to the staking prior to the merge, under current HMRC guidance, ETH staked will be classed as a disposal on entering the staking contract and an acquisition on receipt of the ETH returned once unstaked. This is assumed that the staking activity is provided within a decentralised finance protocol. Any interest/staking rewards earned during the staking period will be taxed as miscellaneous income on receipt.
Next Steps
If you are still unclear on the implications of the merge for you and your taxes, then please do not hesitate to reach out to us directly for further information & support by filling in the contact form here: Click Me.
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