IRS rules were not ready to move to Ethereum. This is unlikely to be the failure that taxpayers suffered when the bitcoin fork in 2017, but there are steps they can take to prepare for any decision by the IRS.
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Income tax you never received? This is possible after the integration of Ethereum
This month, after a lot of preparation and boosting, the Ethereum integration went smoothly. The next test will take place during tax season. Cryptocurrency forks like Bitcoin Cash (BCH) have caused problems for both investors and accountants in the past.
While progress is being made, US Internal Revenue Service regulations are still not ready for something like upgrading the Ethereum network. However, there appears to be an interpretation of the IRS rules that tax preparers and taxpayers can adopt to achieve simplicity and avoid unexpected tax bills.
How Bitcoin Cash crashed the 2017 tax return
Due to the block size controversy, Bitcoin (BTC) was forked in 2017. Everyone who had Bitcoin got an equal amount of the new forked currency, Bitcoin Cash. But when they got it, it created some problems.
Bitcoin Cash was first released in the fall, but did not appear on Coinbase or other major exchanges until December. By that time, the value had increased significantly. For tax purposes, receiving free coins is considered income. Suddenly, many investors have a large return they did not expect.
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Several crypto-savvy accountants have advised clients to request Bitcoin Cash when they are issued, not when they finally arrive in their exchange accounts. None of the IRS guidelines explicitly say this is a good thing—in fact, it goes against the control and oversight accounting principle—but it seems like the only reasonable way to deal with the problem.
The distribution of ETH Proof of Work is another gray area.
Due to problems with Bitcoin Cash revenue reporting, the IRS issued a 2019-24 Revenue Ordinance regarding the handling of blockchain forks. According to the ruling, forks that lead to a new currency being transferred to ether to an existing owner are taxable capital gains. While most investors don’t use “airdrop”, the IRS uses the term to describe when a holder of an existing cryptocurrency receives a new currency from a fork.
A potential confusion with the Ethereum update is that the fork and its own distribution of coins based only on ratings are unclear. One can easily see how the tax authorities can take the position that after the upgrade, ETH (ETH), held in wallets and exchanges around the world, is the new currency, and Ethereum Proof-of-Work (ETHW), which remains in the old currency. network – She is the original.
Cryptocurrency, IRS, Taxes, Tax Cuts, US, Law, Ethereum 2.0
Even if the argument makes sense, this situation will also lead to chaos. All US taxpayers who held ETH or assets such as non-fungible tokens (NFTs) based on Ethereum smart contracts must report the value as ordinary income on September 15. Although it uses old technology, ETHW is clearly a “new” currency.
The investor’s holdings have not changed – rather, the basic consensus mechanism has been upgraded. Unlike Bitcoin Cash, which came from a dispute with two legitimate parties, the Ethereum upgrade had broad support and was only opposed by self-serving miners.
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Another example is when EOS froze the Ethereum-based EOS token and moved its holders to the EOS network. Keeping the coin on the EOS network was not considered taxable as the rights were simply transferred to another chain with the same ticker symbol. (Traders on cryptocurrency exchanges may not have noticed.)
Is the “new currency” always the least accepted currency? Is currency a technology or a society? The IRS probably won’t make a decision on this until tax day in April, so taxpayers and advisers will have to call. But the choice seems obvious.
Additional considerations for investors and developers
Ethereum treasure enthusiasts may want to wait and see if the Ethereum PoW is approved before trying to access the coins. Passing them would provide taxable income, and leave no room for the argument that the fork is a half-hearted fork/farce/scam, like many Bitcoin derivative forks in 2017-2018 that had poor trading value on external exchanges.
If the value of the Ethereum PoW falls before an investor sells it, it could mean that the tax bill will exceed the value of the asset.
