After a lot of building and preparation, the Ethereum integration went off without a hitch this month. The next challenge comes during tax season. Cryptocurrency forks like Bitcoin Cash have caused headaches for investors and accountants in the past.
Despite the progress, the United States Internal Revenue Service regulations were still not ready for something like the Ethereum network upgrade. However, there appears to be an interpretation of IRS rules that tax professionals and taxpayers alike can adopt to achieve simplicity and avoid unexpected tax bills.
How Bitcoin Cash broke the 2017 tax returns
Due to a dispute over block size, Bitcoin It did a fork in 2017. Everyone who owns Bitcoin gets an equal amount of the new fork’s currency, Bitcoin Cash (BCH). But when is What they received caused some issues.
Bitcoin Cash debuted in the fall, but didn’t hit Coinbase or other major exchanges until December. At that time, the price increased significantly. For tax purposes, receiving free coins is income. Suddenly, many investors had a lot of income that they didn’t expect.
Related: Get ready for a swarm of incompetent IRS agents in 2023
Many crypto-savvy accountants have advised their clients to ask for the value of Bitcoin Cash when it is withdrawn, not when it is finally deposited into their currency account. No IRS guidance expressly says this is OK—in fact, it goes against the rule-and-control accounting principle—but it seems like the only logical way to handle the issue.
Airborne proof-of-work ETH is another gray area.
Due to the difficulty of reporting income from Bitcoin Cash, the IRS issued Revenue Regulation 2019-24 to address the treatment of blockchain forks. According to the ruling, forks that depreciate new currency for existing holdings are taxable resources. While most investors don’t use the term “weather”, the IRS uses the term when an existing cryptocurrency holder receives new currency from a fork.
The confusion that can arise with the Ethereum update is that it is not clear that the fork and the main currency are assigned only to the buyer. One can easily see how the IRS takes its place, following the reform, the Ether (ETH) tokens held in wallets and around the world is a new coin, and Ethereum Proof of Work (PoW) – continues. On the legacy network – it is the main one.
While the argument makes logical sense, this position also leads to confusion. Every US taxpayer who holds ETH — or assets such as non-fungible tokens (NFTs) based on Ethereum smart contracts — must claim the value as ordinary income by September 15. Even though it is using the old technology, Ethereum PoW is clearly the “new” coin.
The investor’s assets haven’t changed – instead, the underlying consensus mechanism has evolved. Additionally, unlike Bitcoin Cash, which arose out of conflict with two legal entities, Ethereum’s reform had widespread support and was opposed only by self-interested miners.
Related: Biden is hiring 87,000 new IRS agents — and they’re coming to you.
Another example is when EOS discontinued the Ethereum-based EOS token and moved its holdings to the EOS mainnet. The continuation of the coin on the EOS network was not seen as a tax, because the rights are simply sent to another chain by telecom with the same token. (Crypto exchange traders probably didn’t notice.)
Is the “new coin” always a small coin? Is the coin the technology or the community? The IRS probably won’t rule on this before Tax Day in April, so only taxpayers and advisors should make the call. But the choice seems clear.
More ideas for investors and developers
Tax-savvy Ethereum holders may want to wait and see if Ethereum PoW is accepted before attempting to access the coins. Accepting them will guarantee taxable income without leaving room for arguments that the fork is a half-hearted fork/fare/scam, like many bitcoin forks of 2017-2018 that were lightly traded on distant exchanges.
If the Ethereum PoW price drops before an investor sells, it could mean a tax bill that exceeds the asset’s value. (Bitcoin Cash dropped from $2,500 to $100 in 2018, with a short-lived increase in 2021). On the other hand, the press release of Greyscale Ethereum Trust on September 16 indicates that it will request, sell or distribute income related to the ETH POW coin, so there may be some value to report at the end of the day.
Related: Post-Merger ETH Is Obsolete.
Claiming an Ethereum POW worth less than 1% of the corresponding Ethereum quantity requires some doing. Early adopters often have an advantage in crypto, but a fork is one case where patience can be prudent.
Considering a fork, we must not forget that any crypto developer will always face a tax headache, the severity of which will vary depending on the reason and implementation of the fork. Assuming the IRS once again follows the crypto tax community’s lead, Ethereum reform provides an example of how to do it right.
Justin Wilcox He is a partner in the Connecticut accounting and consulting firm of Fiondella, Milone & LaSaracina. He founded the company’s crypto practice in 2018, providing tax and advisory services to Web 3 organizations and crypto investors. It issues cryptocurrencies like DOGE (still supports Ethereum integration). It contains various cryptocurrencies and NFTs, including the coins mentioned in this article.
This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.