What are the tax implications of an Ethereum merger?

The late Stephen Covey once said that there are three constants in life: change, choice and principle. We're adding a fourth: taxes. Almost everyone in the crypto world has been discussing the Ethereum merger and asking how the merger will affect ETH holders and what it means for the environment. Another key question is, do I have to pay more in taxes? This article will analyze the taxability of merged ETH and what it means for you.

What are the revenue and tax implications of an Ethereum merger?

We will analyze this from different scenarios, what happens to the unstaked pre-merge ETH in your wallet, and what happens when you stake the ETH.

None of the countries have specific tax regulations or guidelines for the treatment of merged ETH. For tax purposes, a merger may be classified as a soft fork, and there are rules for when a soft fork occurs under U.S. tax law. According to IRS FAQ 30 , a soft fork occurs when a protocol is updated (such as a merger), but it does not result in the creation of a new cryptocurrency.

According to IRS guidelines, a "soft fork" occurs when a distributed ledger undergoes a protocol update that does not result in a transfer of the ledger or the establishment of a new cryptocurrency. You will not receive any new cryptocurrency as a result of the soft fork; instead, you will remain where you were before the fork, which means you will not receive any new income. A "soft fork" will put you in the same situation as before, without generating more income, which means it's not a taxable event. This perfectly captures what will happen during the merge. Merging does not form a new Ethereum chain. It makes ETH faster, more scalable, and less harmful to the environment. The old chain will be merged with the beacon chain; no new revenue will be generated; all transaction history will be preserved.

Let's say you have 5 ETH in your wallet. No new revenue generation; the ETH ecosystem upgrades after the merger, converting your PoW ETH to PoS backed ETH.

What happens if ETH is staked before the merger?

You might be thinking, how can I stake ETH before the merge. Isn’t the purpose of the merger just to set up a pledge? Before the merger, some exchanges offered staking; however, the merger completely eliminated the PoW mechanism and converted all ETH to PoS ETH, requiring you to lock up your ETH to earn rewards for staking your PoW ETH (Ether before the merger Square). To lock your ETH, you must convert it to "ETH2" or "ETH2.S", which represent staked ETH.

Note that different exchanges give different names to staked ETH. Coinbase, Binance, and some other exchanges refer to it as “ETH2,” while Kraken refers to it as “ETH2.S.” Because "ETH2" and others are only used as "labels", the pledge before the merger is also a soft fork, and the coins are essentially the same. Just differentiated with a new name; no new cryptocurrency was distributed or minted. For example, let’s say you bought 5 ETH for $200 in 2019, and you staked them on Binance a year later by converting them to ETH2. The value of the converted ETH is $5000. Regardless of the price, the transaction is not taxable because it generates no new revenue.

Different types of pledges and how tax laws in different jurisdictions affect them

As confirmed by Ethereum , stakers will not be allowed to withdraw the original deposited ETH or staking rewards until the stage where the Ethereum 2.0 (PoS ETH Ecosystem) network supports the transaction. This means that ETH2 rewards are illiquid.

Are these illiquid rewards taxable?

There are no regulations for PoS ETH staking revenue, so we will use the closest guidelines we can to determine how staking taxes should be determined for analysis (different tax laws and guidelines in some jurisdictions).

The closest guideline in the US is the Mining Tax Guidelines Notice 2014-21 . While earning rewards on ETH2 is a taxable event, you are exempt from filing an income tax return until you can use, manage, and redeem your rewards. If you invest 5 ETH on Binance in 2022, you get 0.5 ETH as a reward a month later. You don't need to report income because it can't be spent yet. But let’s say Binance gives you a 0.5 ETH staking incentive in 2025. You are now entitled to spend this 0.5 ETH, so you can claim it as income (you can spend it). Until PoS ETH enables this feature (unknown future date), most stakers generally do not receive their rewards. Rewards are currently illiquid with ETH locked.

The closest Canadian guidance is Tax Guidance on Mining: A User’s Guide to Cryptocurrencies . Generally speaking, in Canada, unless you are mining on a commercial scale, you do not pay taxes on mining. What does this mean for illiquid staking rewards as a Canadian? As in the US, you are not required to pay taxes until you have full control over the funds, and as explained earlier, you are exempt from filing income tax returns until you can use, manage and redeem the rewards. The main difference is that if this staking is done as a "hobby" or "fun", then you don't have to declare any income tax, even though you can spend the staking rewards.

Note: Both "hobbyist miners" and "commercial miners" are subject to capital gains tax (CGT) , but income taxes are different.

Let’s say you staked 5 ETH on Binance in 2022 and received 0.5 ETH the next month, it’s not usable yet, but it’s in your wallet. In 2025, Binance lets you get 0.5 ETH, which costs $350, and you don't have to pay income tax on that $350, because you can't be called a "commercial staker."

Now suppose a VC firm stakes 300 ETH, worth $100,000, and receives a staking reward of 30 ETH, worth $3,500. In 2025, Binance lets them earn staking rewards, and it has to pay taxes on staking rewards because they are staked for “commercial purposes.”

Note: The terms "commercial purpose" and "amateur" are usually determined by various factors .

Australia has prescribed guidelines for staking rewards, and the Australian Taxation Office sets out how your staking rewards should be reported. In Australia, you do not need to file a tax return until you have fully received your staking rewards. Once you are funded, you must file other income and capital gains taxes on your staking rewards (after you sell).

In the UK, HM Revenue and Customs (HMRC) has also established regulations regarding staking rewards. The specific facts will determine whether such a pledge constitutes a taxable transaction (crypto-assets as transaction income), taking into account various variables including activity volume, organization, risk, commerciality.

You do not have to file taxes until you have fully received your staking rewards. Once you have earned your staking rewards, you must declare income tax and capital gains tax or corporate tax on taxable gains (CGTC) for your staking rewards.

liquid pledge

Some staking protocols such as Lido, RPL, Marinade Finance provide liquid staking. Liquid staking not only provides the ability to stake cryptocurrencies to earn rewards, but also allows stakers to continue investing with locked assets and earn yields in other activities. So whether it's the ETH staked or the staking rewards you get, you have control and can invest them in other activities. Returns earned through liquid staking are taxable income.

This means you don't have to wait a while to get your staking rewards. So once you get your staking rewards, you can deal with it (sell, swap, etc.).

Converting ETH to stETH is a taxable event as it is not the same as the ETH you own. It allows you to earn staking rewards that you can use and control, the price of stETH is not exactly pegged to ETH, they are priced differently (different assets). Earnings should be reported immediately after you receive your reward. Also, when you sell stETH, another taxable event is triggered. Note: 'stETH' is ETH representing liquid pledge.

For example, you exchange your 5 ETH (with a cost basis of $5000) for 5 stETH worth $5500. Over the next year, you earn 0.5 stETH worth $500. Your taxes will be $500 in capital gains (5500-5000) and $500 in ordinary income (subsequent returns on staking stETH).

How does this differ from the illiquid pledge tax in each of the jurisdictions above?

In the above jurisdictions, for non-liquid staking rewards, you have to get the rewards before filing taxes, but in liquid staking, you need to declare income tax when you receive staking rewards, and when you sell staking rewards, another trigger will be triggered. A taxable event is subject to tax reporting in the United States.

In Canada, you have to be a "business" staker to report income tax when you receive an award, and anyone who sells is required to report capital gains tax.

In Australia everyone (both business and amateur) is required to report other income tax when receiving an award and capital gains tax when disposing of it.

In the UK it is determined by factors such as commerciality, risk, number and organization of activities. Any cryptoasset staking rewards (when received) that result from successful mining and staking will generally be taxed as income (miscellaneous income), with any necessary expenses reducing the taxable amount if the mining activity does not equate to a transaction.

If the activity qualifies as a transaction, any income must be determined under applicable tax laws. If the "staker" keeps the reward, he is subject to capital gains tax or corporate tax on taxable gains when he disposes.

summary

The proof-of-stake mechanism has significantly changed the Ethereum ecosystem. But, from a tax standpoint, there's no reason to be afraid. While there is no dispute that the combined staking rewards will constitute income for tax purposes, it answers questions about how they are assessed.

Disclaimer: This article is not intended as tax advice, always consult a lawyer/accountant.