CryptoSlate spoke with Tony Dhanjal, Head of Tax at Koinly, a crypto-focused tax software company.
Koinly allows users to create tax reports by linking wallets and exchange accounts and then using on-chain data to calculate any tax liabilities.
Creating tax reports for crypto can be almost impossible for the average user and can lead to high accountant costs due to the potentially vast number of transactions that need to be processed.
Given Koinly’s deep understanding of both tax and crypto, CryptoSlate spoke with Dhanjali about the upcoming Ethereum merge to find out if the event will trigger any taxable events.
What are the main tax implications of the merge?
It all depends on whether there is a (hard) fork of the incoming Proof of Stake (PoS) chain (currently on the beacon chain) and the original Proof of Work (PoW) chain.
If there is no hard fork, it is unlikely that the change in PoW to PoS consensus mechanism resulting from the merge will create a taxable disposal event by virtue of there being no new crypto asset – ETH will remain as ETH.
Existing ETH holders will simply get an ETH PoS token in exchange for the original token on a 1:1 basis, and the original cost basis is attributed to the new PoS token.
If a hard fork occurs, then there is a potential tax implication, depending on where you live as a tax resident.
Are there any specifics for territories such as the UK or US that people should be aware of?
In the US the IRS has not issued any guidance on a merge event per se. However, the IRS offers clear guidance when it comes to hard forks and that is – if an investor receives an airdrop of new coins following a hard fork, then they have taxable income. The taxable income is based upon the fair market value at the point of receipt of a PoW token airdrop in the hands of the investor – if it is zero at the point of receipt, then ultimately this is the fair market value and mathematically, the tax on zero is zero.
In the UK – according to current…
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