According to tax experts, Ether ( ETH) hodlers who don’t play their cards following the Ethereum Merge could be facing a large tax bill.
The Ethereum blockchain will transition from its current Proof-of-work (PoW), consensus mechanism, to proof-ofstake (PoS) on Sept. 15. This is a move that aims to improve the network’s environmental impact.
The Merge could lead to a contentious hardfork. This will allow ETH holders to get duplicate units of hard-forked Ethereum tokens. It is similar to the 2016 Ethereum and Ethereum Classic hardfork.
Miles Fuller, TaxBit’s head of government solutions at TaxBit, stated to Cointelegraph that the Merge has interesting tax implications in the event that there is a hard fork.
“The most important question regarding tax is whether the Merge will lead to a chain-splitting, hard fork.”
Fuller explained that if it does, there are no tax implications. He also noted that the PoW ETH will become the PoS ETH, and everyone continues their merrymaking.
However, if a hard fork happens, which means that ETH holders receive duplicate PoW tokens, then a range of tax consequences may occur “depending how supported the PoW ETH Chain is” and where the ETH was held at the time.
Fuller cites IRS guidance as a guideline for ETH that is held in user-owned wallets on-chain. It states that any new PoW ETH tokens will be considered income and be valued at the time they are received.
Fuller said that the situation could be different for ETH stored in custodial wallets such as exchanges depending on whether the platform decides support the forked PoW ETH Chain.
“How exchanges and custodians handle forks” is usually covered in your account agreement. If you’re not sure, it’s worth reading.
If the exchange or custodian does not support the forked chains, you will likely have no income and may have missed out on a bonus. To avoid this, you can move your holdings to an unsolicited wallet pre-Merge in order to get any tokens or coins resulting from a chain-splittingfork,” he said.
According to Miles Brooks, CoinLedger director strategy, Wednesday’s tweet from Brooks, the PoW token’s performance can have an impact on the tax bill.
“If the tokens’ value drops significantly after the PoW Fork (and after you have full control over them), you might have to pay a tax bill but not enough assets.
Brooks suggested that it might be in the best interest of an investor to sell some tokens after receiving the forked coin. This will ensure that the minimum tax bill is covered.
7/ What should you do? You’ll want to find out if your ETH PoW is possible. If it does, it’s a good idea to check if you are eligible.
— CoinLedger (@CoinLedger)
August 30, 2022
Some exchanges are pushing for an Ethereum hard fork. This is because Ethereum miners won’t be able to fork without it.
At the 5th Ethereum Community Conference, held in July, Vitalik Buterin suggested that these miners could instead return to Ethereum Classic.
Related: Why Ethereum PoW hard fork tokens will not gain traction
Contrary to the suggested of the CoinLedger article , the post-merge Ethereum won’t be called ETH 2.0, but ETH or ETHS. Any potential forked token will be called ETHW.
Any token that claims to be ETH 2.0 post Merge should be avoided by crypto investors
Poloniex claims that it is the first cryptocurrency exchange to support Ethereum Classic and Ethereum Classic. It has already added trading to ETHW.
Cointelegraph was informed by Bybit, a cryptocurrency exchange. They stated that In the event of forked tokens Bybit’s security and risk management teams have established criteria to determine if a PoW token will be listed on their exchange.
Bybit asserts that exchanges that have already listed ETHW tokens are putting profit over user safety and warns traders not to move their ETH to PoW token-supporting exchanges due to security and volatility.
We warn traders that potential Ethereum PoW Forks could be highly volatile and may pose increased security risks. Token exchanges that have already listed tokens for possible PoW forks may be putting profit before safety.