CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

Will ETH be taxable after The Merge?

By Daniela Ešnerová

10:06, 9 September 2022

Tax return document with coins with crypto logos on it.
Capital.com asked cryptocurrency tax experts about possible tax implications of The Merge and a possible subsequent Ethereum’s hard fork. – Photo: Shutterstock

Ethereum’s blockchain update is around the corner and it raises questions about its potential tax implications. As with many things in this maturing market, cryptocurency tax rules are still emerging.

In 2019, the US tax agency, Internal Revenue Service (IRS) published guidance saying hard forks are taxable events. Meanwhile, The Merge is widely expected to be followed by ETH’s hard fork.

What could these events mean for ETH holders’s tax obligations? Capital.com asked cryptocurrency tax experts whether ETH could be taxable following The Merge.

What is your sentiment on ETH/USD?

3540.64
Bullish
or
Bearish
Vote to see Traders sentiment!

ETH to US Dollar:

What is The Merge? Will Ethereum’s hard fork follow?

The Merge is Ethereum’s blockchain’s transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism. This will be done by merging existing Ethereum PoW chain with PoS system and it will mark the end of PoW for Ethereum and the full transition to PoS.

The Merge is widely believed to be followed by ETH’s hard fork – or breaking the post-Merge PoS chain into PoW chain EthereumPoW (ETHW).

According to the IRS’s Revenue Ruling 2019-24 hard forks and airdrops are taxable events for which recipients must treat the newly received cryptocurrency as ordinary income. 

Will ETH be taxable after The Merge? 

IRS would *probably* view the value of ETHW as income

William & Mary Law School’s Professor of Law Eric Chason:
 
“Most market participants will recognize the new proof-of-stake coin as ETH. The old proof-of-work coin would continue under ETHW (or ETHPoW). 
 
“I think the IRS would follow this pattern. The new proof-of-stake protocol continues an investor’s holding in ETH, while the old proof-of-work protocol would be considered a newly acquired coin. 
 
“At a technical level, this doesn’t make sense as ETHW carries forward the old protocol. But it does reflect how most in the community would view a fork. Presumably, ETH will have much greater value than ETHW. 
 
“To answer the question, ETH itself is not taxable under the hard fork. The question is how to treat the ETHW value. The IRS tried to give this issue some clarity in 2019, but their guidance was problematic. I think the IRS would *probably* view the value of ETHW as income.”

Suzanne-MorsfieldThe Merge is a ‘soft fork’ for tax purposes, the guidance says

Suzanne Morsfield, Head of Accounting Solutions at crypto-focused software firm Lukka

BTC/USD

67,660.40 Price
+0.800% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

XRP/USD

0.60 Price
+3.710% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

DOGE/USD

0.14 Price
+8.170% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

SOL/USD

175.25 Price
+2.710% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.2652

“The frustrating answer is, ‘it depends’. It can depend on many factors, but a key one is what type of fork it is for US federal tax purposes. 

“And, as with many things in tax, substance vs. form matters. So, the substance as determined under tax guidance will drive the tax treatment, regardless of what the crypto community calls The Merge.

“In other words, while the community may refer to it as a ‘hard fork’, the tax guidance may, instead, say it’s a ‘soft fork’ for tax purposes. 

“New types of crypto assets received as the result of a hard fork (as determined by US tax guidance) are generally taxable. Soft forks (with the same caveat) generally are not.

“Related to that, we always also have to ask, what type of fork is The Merge likely to be for US federal tax purposes, and why? Most tax observers think that The Merge itself is consistent with a soft fork for tax purposes. Much of the thinking behind this conclusion relies on IRS Frequently Asked Questions on Virtual Currency Transactions (FAQ 30), which defines a soft fork as “a protocol change that does not result in a diversion of the ledger and thus does not result in the creation of a new cryptocurrency.

“An important implication for holders prior to The Merge is that to avoid a taxable event afterwards, then the substance of what you hold subsequently must not be a new crypto asset. 

“It is on this point that there appears to be a consensus – i.e., that you will not receive a new crypto asset as a result of The Merge.” 

Markets in this article

ETH/USD
Ethereum / USD
3540.64 USD
28.92 +0.820%

Related topics

Rate this article

Related reading

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided in this article is for information purposes only and should not be understood as investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents and has not been prepared in accordance with the legal requirements designed to promote investment research independence. While the information in this communication, or on which this communication is based, has been obtained from sources that Capital.com believes to be reliable and accurate, it has not undergone independent verification. No representation or warranty, whether expressed or implied, is made as to the accuracy or completeness of any information obtained from third parties. If you rely on the information on this page, then you do so entirely at your own risk.

Still looking for a broker you can trust?

Join the 630,000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading