The Ethereum Merge

The most anticipated recent event in the cryptosphere, the Ethereum Merge, happened on 15th September 2022, completing the last stage of the transition of the Ethereum blockchain from the old Proof of Work (PoW) consensus protocol, to the new Proof of Stake (PoS) protocol. This is a crucial step on the roadmap to Ethereum 2.0 and sets the groundwork for the introduction of sharding in 2023-24.

Proof of Stake provides increased security and sustainability, as well as a 99.95% reduction in energy consumption. Given the prominence of ESG investing and the high costs of electricity, this is a great step towards making crypto more palatable to mainstream investors.

What does this mean in practice from a tax point of view?

If you held ETH on an exchange like Binance, Kraken or Coinbase, you will have received a 1:1 token distribution of ETHW. This is because the Ethereum blockchain has split in two, effectively causing a hard fork. In most cases, token receipts resulting from a hard fork would be taxed as income. However, this is a grey area, and the cost basis allocation from the original ETH on the POW chain could mean a net zero tax position.

HMRC have provided some guidance on this and have clarified that they consider the merge to be a one-way transfer. This means that they will not view it as a taxable event subject to capital gains tax, and that the cost basis of the original ETH held will be attributed to the ETH (PoS) tokens, with any subsequent disposals realising a gain or loss in the normal manner.

If you already had staked ETH, or ETH held in non-custodial wallets, the tax implications can be more complex. There can be intricacies to individual arrangements, so if you have any doubts or questions, please get in touch.