Ethereum Taxes After the Merge

Is staking ETH a taxable event? What about earning rewards? Get answers here.

Arthur Teller
ByArthur Teller, CPAUpdated on September 23, 2022 · minute read

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Key Takeaways

  • If you do not receive a token in return when you stake ETH, you likely have not experienced a taxable event.

  • If you do receive a token in return when you stake ETH (cbETH, stETH), you may elect to treat the transaction as taxable or non-taxable.

  • ETH 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.

Ethereum Taxes After the Merge

With the historic Merge (mostly) complete, Ethereum is now a proof-of-stake (PoS) chain. Put simply, this means that instead of reaching consensus and validating new blocks by asking the network to expend energy solving puzzles (proof-of-work or PoW), Ethereum now does so by asking the network to lock up funds in the protocol. 

Before the Merge, investors had the opportunity to stake ETH to “ETH2” in exchange for rewards, either as a full validator or through staking pools organized by a custodian like Coinbase. ETH 2 was a bit of a misnomer, as PoS ETH was always intended to replace PoW ETH at a 1:1 basis. 

Although Ethereum is now PoS, staking rewards won't be available to withdraw until the Shanghai upgrade is complete, which is expected to be in 6–12 months. However, despite not being able to cash out rewards, Ethereum investors may still have tax consequences for staking. 

Is staking ETH to ETH 2 taxable? 

It’s not clear whether staking ETH to ETH 2 was a taxable event. The IRS has not issued any guidance on the issue.

As mentioned above, technically speaking, PoS ETH replaced all ETH tokens on a 1:1 basis, with all PoW ETH coins being burned in the process. This leads some to argue that the Merge was simply an upgrade; the act of locking up funds did not result in additional wealth or indicate intention to dispose of the coin. Proponents of this argument also point to the fact that post Merge, the ticker “ETH2” is in the process of being eliminated, since all ETH now supports PoS.

However, depending on how and where ETH was staked, there’s a possibility that the transaction would be interpreted as taxable. For example, on Coinbase, ETH2 had its own ticker, which could suggest that ETH -> ETH2 was an exchange. Similarly, on Lido stakers received stETH when staking to ETH2. If you chose to see staking as a taxable event, any capital gain or loss would be the difference between the value of the ETH when you purchased it and when you staked it.

The bottom line is that, with the support of your crypto tax accountant, you could elect to choose staking ETH to ETH2 as a taxable event or as a non-taxable event.

When is staking ETH not taxable? 

If you stake ETH and do not receive any token in return, you have likely not realized a taxable event. 

Is receiving cbETH taxable?

Coinbase has given investors the opportunity to wrap their staked ETH in order to have a liquid representation of their deposit; the wrapped coin is called cbETH. Similarly, on Lido, stakers receive stETH. Wrapping tokens is a gray area in DeFi taxes; the IRS has not provided guidance. 

The safest approach is to treat wrapping staked ETH as a taxable event; the blockchain record shows that ETH was exchanged for cbETH. However, with the support of your crypto tax advisor, you may elect to treat wrapping ETH as a non-taxable event. 

Is earning 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 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 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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Arthur Teller
Arthur TellerCOO at TokenTax
Arthur came to TokenTax after 12 years at KPMG. A specialist in partnership taxation and enterprise tax software, he is a licensed CPA in both California and Illinois and a member of the AICPA.

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