The Tax Implications of the Ethereum Merge (2024)

FAQs

How to avoid capital gains tax on crypto? ›

ETH2 was a bit of a misnomer, as PoS ETH was always intended to replace PoW ETH on a 1:1 basis. A concern some had prior to the Shanghai Upgrade is whether the Merge would be considered a taxable event for holders of the blockchain's native token. This is not the case.

For individual US taxpayers, staking rewards can be reported as 'Other Income' on Form 1040 Schedule 1. Capital gains from the disposal of staking rewards are reported with Form 1040 Schedule D. Businesses that earn staking rewards use Schedule C.

If you buy Bitcoin, there's nothing to report until you sell. If you earned crypto through staking, a hard fork, an airdrop or via any method other than buying it, you'll likely need to report it, even if you haven't sold it.

There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.

Quick Look: 11 Ways to Minimize Your Crypto Tax Liability

When you hold your cryptocurrency for 12 months or longer, you pay a lower tax rate (0-20%). Dispose of crypto in a year when your income is lower than you expect it to be in the future. Giving a cryptocurrency gift is not subject to tax in most cases.

Your ETH tokens which are held on the current Ethereum chain, will automatically be accessible on the Ethereum 2 chain and you do not need to do anything. If you send your ETH to the deposit contract to start staking on the Ethereum 2 blockchain, they will be locked until Phase 1.5 of the Ethereum 2 transition.

How is ETH transfer gain tax calculated? Tax on crypto income is to be paid at a 30% flat rate. The taxable amount of ETH transaction gains can be calculated by reducing the cost of acquisition, i.e. the purchase cost, from the consideration amount received.

If you sell cryptocurrency after owning it for more than a year, you'll pay long-term capital gains. Long-term capital gains have their own system of tax rates. While these types of gains aren't taxed as ordinary income, you still use your taxable income to determine the long-term capital gains bracket you're in.

However, it's important to note that you won't be taxed on the same profits twice. When you dispose of cryptocurrency, you will incur a capital gain or loss based on how the price of your staking rewards has changed since you originally received them. Technically, you won't pay capital gains tax on the same income.

Does crypto staking count as income? ›

Selling crypto - including staking rewards - is a disposal of an asset and any gain is subject to Capital Gains Tax. You'll use the fair market value of your staking rewards at the point you receive them as your cost basis.

IRS Staking Rewards

As of July 31, 2023, the IRS has finally updated its guidance clarifying that staking rewards are taxable once received. The ruling clarifies that staking rewards should be treated as income upon receipt and taxed as such.

If you've undergone a know-your-client process with exchanges like Binance.US or Coinbase, the IRS can track and associate your crypto activity with you. To avoid potential complications, accurately report all crypto gains in your annual filings and work with a crypto tax professional to clarify your tax situation.

You will only report and pay taxes on crypto you've earned or which you purchased and later sold or exchanged for other crypto. To avoid capital gains tax on crypto, consider tax-loss harvesting, donating or gifting crypto, aiming for long-term capital gains, or simply not selling.

Some cryptocurrency exchanges do not report user transactions to the IRS, including: Decentralized crypto exchanges (DEXs) like Uniswap and SushiSwap. Some peer-to-peer (P2P) platforms. Exchanges based outside the US that do not have a reporting obligation under US tax law.

This is considered a disposal event subject to capital gains tax. If you disposed of your cryptocurrency and reinvested your proceeds, you are still required to pay capital gains tax. Yes. Trading one cryptocurrency for another is subject to capital gains tax.

Thankfully, crypto losses are a candidate for tax write-offs, like any other type of investment losses. That means you can use the losses to offset capital gains taxes you owe on more successful investment plays.