Ethereum 2.0 Tax Guide
Is staking ETH 2.0 a taxable event? What about earning rewards? Get answers here.
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With the support of your tax professional, you could elect to choose staking ETH to ETH 2.0 as a taxable event or as a non-taxable event.
ETH 2.0 staking rewards will be taxed as income. The question is when that taxable event will occur—when they are earned or when they are unlocked.
In 2021, many crypto investors excitedly staked their Ethereum 1.0 (execution layer) to Ethereum 2.0 (consensus layer), the long-awaited proof-of-stake (PoS) blockchain upgrade. Although being a full validator requires 32 ETH, many crypto exchanges, including Coinbase, allow individuals to enter staking pools with fewer funds.
Since then, stakers have earned ETH 2.0 rewards. These aren’t available to be withdrawn yet; this won’t be possible until ETH 2.0 launches, which may be a year or more.
Because ETH 2.0 staking rewards are not yet liquid, and because ETH and ETH 2.0 will ultimately be merged, it may seem like staking ETH 2.0 wouldn’t result in any tax liabilities. However, the situation is more complex.
When will ETH 2.0 launch?
ETH 2.0 will likely launch in 2023. Investors began to be able to stake ETH 2.0 in 2021, but the full merge has not yet occurred, so ETH 2.0 rewards are not able to be withdrawn at this time.
Is staking ETH to ETH 2.0 a taxable event?
It’s not clear whether staking ETH to ETH 2.0 is a taxable event. The IRS has not issued any guidance on the issue.
Technically speaking, ETH 2.0 will eventually replace all ETH tokens on a 1:1 basis, with all ETH coins being burned in the process. This leads some to argue that the merge is simply an upgrade; the act of locking up funds does not result in additional wealth or indicate intention to dispose of the coin. Proponents of this argument also point to the fact that after the Merge, the ticker “ETH2” will go away, since all ETH will now support PoS.
However, on Etherscan the transaction looks like a crypto-to-crypto trade, which typically would be a crypto taxable event. Because some IRS crypto audits focus on transaction data, there is concern among some in the crypto tax community that ETH->ETH 2 will be interpreted by the tax agency as a trade. If this were the case, then any increase in the value of ETH from the time you purchased it to the time you staked it would be taxed as a capital gain.
The bottom line is that, with the support of your crypto tax accountant, you could elect to choose staking ETH as a taxable event or as a non-taxable event. It's important to note that treating these transactions as taxable does not necessarily mean you are paying more in taxes. Different treatments only affect total tax liability when:
You have both capital gains and losses of the ETH AND
Some of your transactions are long-term, and some are short-term.
Are ETH 2.0 staking rewards taxable?
Once again, the unique nature of the Ethereum upgrade causes uncertainty about the taxation of staking rewards. One thing is certain: ETH 2.0 staking rewards will be taxed as income. The question is when that taxable event will occur.
Typically, the receipt of crypto assets is considered taxable income when a taxpayer exercises “dominion and control” over the received asset(s). However, ETH 2.0 rewards are locked up; no one can trade or withdraw the funds. And in certain rulings, the IRS has stated that “immediately [having] the ability to dispose of” an asset is what constitutes a taxable income event.
This raises questions about when income is realized. The most conservative approach is to report staking rewards when your Earn balance increases. This is a safe route, and would also start your long-term capital gains clock earlier.
However, you could also opt to wait until the funds are available to claim them (with the guidance of a qualified tax professional). This would delay taxation, but depending on market fluctuations, could also result in the fiat value of your rewards being higher than it would have been if you claimed them when they were displayed in your Earn balance.
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