Will the merger become a tax drama?

After the successful Bellatrix update of September 6th, it should be clear: Next week the Ethereum merge (hopefully successful) will take place. However, this will also result in significant changes in the network. This also raises the question: How are the events surrounding the merger to be assessed from a tax perspective?

New chain, new tokens?

Technically, with the change in consensus mechanism, new ETH coins are also finding their way to hodlers: the Proof of Stake ETH coins. ETH-old becomes ETH-new on a 1:1 basis. This process is to be regarded as a soft fork. Nothing changes for users in terms of tax law. The new Proof of Stake Coin behaves like the previously held tokens in this regard.

This is also confirmed by Werner Hoffmann, Managing Director of Pekuna GmbH, which specializes in solutions for the taxation of cryptocurrencies.

The time of acquisition should therefore not change for the new coins and should be the same as the old ones. However, the situation could be completely different with the impending hard fork of Ethereum. There may even be a bigger problem rolling in for investors here.

Ethereum hard fork and its consequences

“The impact of a possible ETH fork is actually a complete disaster from a tax point of view,” warns Hoffmann. It is now known that some miners will resist the change in consensus mechanism. They plan to split the Ethereum blockchain during the merger and create a new Ethereum Proof of Work Coin (ETH-POW).

The problem: In theory, all coins in the blockchain, including ETH, are copied during this split. So new coins are created, which flow to the holders of the existing Ethereum coins. This can be seen as a kind of “compulsory purchase” – regardless of whether owners want it or not. But then taxes would be due. A true nightmare scenario is emerging.

According to the Federal Ministry of Finance, with the new coins, the acquisition costs would have to be recalculated retrospectively and divided according to circumstances. The BMF listed this income tax treatment in a letter from May.

Pekuna has already criticized this rule. In July 2021, the company warned in a statement on a draft of the letter of the impending complication of the current assessment methodology for hard forks:

First, all forks of an asset would have to be determined and chronologically classified, then the starting rates and the rates of the main currency would have to be determined. After the calculator has put the two courses in relation, he would have to create fictitious purchases for the later forked coin for each purchase process.

Pekuna GmbH

However, documenting the whole thing would be unimaginably complex. But owners have to be prepared for this.

What to do with the coins?

In the event of a smooth process without a split, the world would still be fine for ETH Hodler. However, should a hard fork take place, they would have to be aware of the effects.

Hoffmann is nevertheless alarmed. Most people are not aware of the extent of this problem. His company is already in contact with the BMF to try to avert a “tax catastrophe”.

In his opinion, the hands of the Ethereum holders are tied to a certain extent. If you do not want to receive the coins from a hard fork, you can only deposit your existing Ethereum balance on an exchange that does not support ETH-POW. Without an inflow of forked coins, there could be no tax.

Otherwise you have to deal with the tax treatment. Hoffmann considers the method of “defining the value at the time the split coin was created to be zero and not touching the initial coin” to be a more sensible assessment.

It is true that the coins can be sold tax-free after the speculation period of one year has expired. If the price of the ETH-POW increases dramatically in the meantime, there will be a great temptation for many to sell the “gift coins”.

A concrete solution to the problem is still awaited. However, the Ethereum merge is coming next week.