The Ethereum merger led to a proof-of-work airdrop. That means he could be on the hook for tokens he didn’t even want.

Ethereum Merge dominated the cryptocurrency world in September with promises of faster transaction times, improved security, and a 99% reduction in power consumption. However, will you also end up with a surprise tax bill? Let’s investigate.

During the Merge Event, the Ethereum Mainnet, the current Proof-of-Work (PoW) Blockchain, merged with the Proof-of-Stake (PoS) Beacon Chain, marking the end of PoW as a consensus mechanism for the Ethereum Blockchain.

On Beacon Chain, Ethereum has joined the ranks of other major PoS blockchains such as BNB Chain, Cardano and Solana. Ether

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it is the second largest cryptocurrency by market capitalization after Bitcoin

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, and Ethereum is the chain that has led decentralized finance (DeFi) and non-fungible token (NFT) activity. The merger heralds many ramifications, but what about the potential tax implications for investors, traders and businesses? It’s doubtful that anyone would be happy with a surprise tax bill, but that’s potentially exactly what you’ll get.

What are the possible tax implications?
If we take a short trip down memory lane back to the Bitcoin Civil War in 2017, it ultimately ended in an on-chain split between Bitcoin and Bitcoin Cash.

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. This event was created, no pun intended, as a hard fork.

In this case, new BCH coins were issued to BTC holders, and as a result, this resulted in taxable fair market value income from the receipt of BCH for recipients. Additionally, once each BCH holder has disposed of their coins, any accrued profits or losses will be subject to capital gains tax.

Related: Post-merger ETH has become obsolete

Is a civil war brewing among the Ethereum community because of the merger? There are certainly rumors, and it seems that the PoW consensus may continue to be supported by some Ethereum miners. This possible forked version of Ethereum already has the ticker ETHW, which stands for EthereumPoW, with ETHW continuing to be the PoW code base and ETH forking onto the new proof-of-stake chain.

The tax implications depend on where you live: your tax residence.

In the United States, the Internal Revenue Service (IRS) has not issued specific guidance on mergers per se. However, for ETH holders receiving an equivalent ETHW airdrop, this is certainly subject to income tax, just as BCH was in 2017. The IRS has clear guidance on this.

In the UK, an ETHW airdrop is treated differently. According to the guide, it can be concluded that no income tax is applied at the time of receipt. HM Revenue and Customs has gone a step further and provided some guidance for what it describes as a one-way transfer, citing the mainnet upgrade from Ethereum to Beacon Chain. His view is that section 43 of the Taxable Gains Act 1992 will apply to this scenario. In short, the merger did not trigger a taxable event subject to capital gains tax. Instead, your existing ETH cost base will be attributed to your ETHW token and any subsequent dispositions will accrue a profit or loss as normal.

What about staking and mining?
Investors and traders can stake (and lock) their ETH and get rewarded. They should take a conservative approach to these rewards, even if tax guidance is unclear.

For US holders, after the merger, crypto-mining and staking will be subject to income tax at the time of receipt and capital gains tax (CGT) at the time of disposition. However, staking is a controversial issue and subject to an ongoing court case, so this may change in the future as the case progresses.

In the UK, ETH mining and staking rewards are generally miscellaneous income (less certain allowable costs) and are subject to income tax on receipt and CGT on disposal. However, this also depends on the level of activity, organization, risk and commerciality.

So what are the odds?
In a hard fork, the mainnet blockchain becomes part of the newly merged blockchain. All smart contracts together with the above data are

Source: CoinTelegraph