It therefore appears that an upgrade from ETH to ETH2 falls outside of the definition of a hard fork and doesn't result in an accession of wealth. It is therefore reasonable to conclude that converting ETH to ETH2 is not a taxable event, and a user will maintain their original cost basis prior to the conversion.
With Ethereum 2. The IRS has direct guidance on the tax implications of mining, finding that a taxpayer who mines virtual currency recognizes ordinary income at the time of receipt. The existing guidance on mining conforms with Section 61 finding that all accessions to wealth, from whatever source derived, are included in gross income. Similar to mining, staking results in an accession to wealth that is analogous to receiving interest on property.
Accordingly, the most logical interpretation is to find that staking results in ordinary income at the time the asset is received for the fair market value of the asset. This tax form will make it easy for users to know how much income they have generated on an exchange through staking activity. TaxBit Enterprise works with cryptocurrency exchanges to comply with their obligations to provide users with the necessary forms to complete their taxes.
The transition to Ethereum 2. It appears that exchanging currency on Ethereum to Ethereum 2. However, it's important to be aware that staking Ethereum 2. TaxBit makes the process of reporting on these transactions simple. Individual Investors Free cryptocurrency tax forms.
Enterprise Tax Form and tax reporting solutions. Justin Woodward Crypto Tax Attorney. Below, we'll address: Quick overview of Ethereum 2. What are the Tax Implications of Ethereum? The change in protocol to Ethereum 2. What are the tax implications to staking Ethereum 2. Converting Ethereum to Ethereum 2. What is a hard fork?
Will taxpayers own legacy currency on Ethereum 2. Less commonly, companies issue tokens that represent an ownership interest in the company or other property, or that are intended simply as a means of exchange. The issuance by a U. As discussed below, in many of these situations, a domestic issuer will recognise income upon the issuance of the tokens or, potentially, later, when the services are performed. The U. In , the IRS issued Treas.
Although the Software Regulations were issued long before blockchain technology was even contemplated, they logically can be used as a starting point for determining the character and source of income from a cryptocurrency transaction.
Under such regulations, income from the transfer of intangible property is classified as: 1 the sale of copyright rights; 2 the license of copyright rights; 3 the sale of a copyrighted article; 4 the lease of a copyrighted article; 5 the provision of services related to a computer program; or 6 the provision of know-how related to a computer program.
Generally, the issuance of tokens should not result in the transfer of copyright rights because token purchasers generally do not acquire unfettered rights with respect to the underlying blockchain technology. While tokens can provide the right and ability to build upon a blockchain platform, this right would appear to be more in the nature of a service or a licence rather than a right to prepare a derivative work.
A private blockchain created with Geth is a new asset facilitated by Ethereum, but is not a derivative of Ethereum. However, the issuance of tokens might be analogised to a sale of intangible property that has indicia of a copyrighted article in that the purchaser acquires all of the benefits and burdens of an asset i.
It is unlikely that newly issued tokens qualify as capital assets in the hands of the issuer. Since newly issued tokens are created with the intention of selling them, they could be viewed as inventory. In a situation where the tokens are issued based on open-source technology, with all of the actual development to come afterward, the jurisdiction of the issuer might be the place of production. However, the place where the concept was created or tested or where the programmers sit might be a more realistic alternative.
Potentially, the consideration received for the issuance of tokens could be treated as compensation for the provision of services provided by the issuer. A blockchain platform may also provide automated services by acting as an online intermediary linking customers with providers or by hosting or streaming information or content that can be accessed by token holders.
In such a case, sourcing the revenue will present more than the usual challenges for sourcing income because of the decentralised nature of blockchain technology. Generally, income must be recognised immediately upon receipt of consideration for the transfer of property or the provision of services — i. However, in certain limited circumstances, an accrual basis issuer can defer taxation on at least a portion of the amount received to the succeeding taxable year if the receipt of the consideration is treated as an advance payment for future goods or services e.
Generally, under the common law open transaction doctrine, the execution of a forward contract will not be a taxable event until the transaction is closed. Regardless of when the income is recognised, a U. For foreign issuers, operating losses can be carried forward for use against U. Notice provides that a taxpayer who receives cryptocurrency as payment for goods or services must include in gross income or gross receipts the fair market value of the tokens, measured in U.
The purchase of tokens in an ICO using fiat currency should not be a taxable event for the purchaser. However, if tokens are purchased using another cryptocurrency, a U. If tokens are subsequently sold or transferred in exchange for goods or services, the transaction generally will be a taxable event and will give rise to capital gain or ordinary income depending on their character in the hands of the token holder.
If the tokens were held as an investment or for trading, then the gain or loss generally should be capital gain or loss, and would be short term or long term depending on whether the tokens were held for more than one year. If the tokens were held by an individual as personal-use property and not for investment e.
Accordingly, the contribution of tokens or cryptocurrency to a corporation in exchange for its stock or to a partnership in exchange for a partnership interest should not result in any gain or loss if a transfer of any other property would result in non-recognition e. If the tokens are not held as capital assets or personal-use property and do not qualify as Section assets e. To date, there is no de minimis exception for small transactions, and a significant issue for token holders is how to determine the basis of the particular tokens used and the value of the property or services received in return.
Generally, airdrops occur when a new blockchain project distributes free tokens to existing holders of certain cryptocurrency such as Bitcoin and Ethereum. Issuers may also issue tokens as rewards for using an app, purchasing merchandise, referring customers, watching advertisements, etc. As a result, a new blockchain is created that follows the updated rules, while the pre-split blockchain that follows the legacy rules still exists.
A holder of a pre-split cryptocurrency generally receives additional cryptocurrencies that are generated by the newly created blockchain. For example, Bitcoin hard forks that occurred in August and October created a split in the existing Bitcoin blockchain, and pre-split Bitcoin holders received Bitcoin Cash and Bitcoin Gold, respectively.
A soft fork is a backward-compatible method of upgrading existing nodes. If a majority consensus is reached for the new rules, then only the new chain is followed. In soft forks, holders may also be required to take affirmative action to get access to or convert their outdated tokens which may be worthless for the upgraded tokens. Generally, a U. The tax treatment of the receipt of the new cryptocurrency will be based on whether the owner of the legacy cryptocurrency is able to take dominion and control over the new cryptocurrency generated as a result of the hard fork.
Owners of an existing cryptocurrency who do not receive dominion and control over the new cryptocurrency at the time of the hard fork for example, because their wallets may not be compatible to support the new cryptocurrency will not have income at the time of the hard fork.
They presumably would have income when they achieve dominion and control over the new cryptocurrency, although this is not specifically stated. Similar to hard forks, the IRS would also consider receipt of tokens by a taxpayer via airdrops or rewards as undeniable access to wealth and therefore taxable. Tokens received in hard forks, airdrops, or as rewards generally must be included in income at their fair market value.
Most airdropped tokens have zero value at the time of the airdrop and will not result in any taxable income unless the taxpayer achieves dominion and control over the airdropped token only when it has more than zero value. However, tokens received in hard forks, e. The value of tokens received as rewards will have to be determined based on the facts. Notice does not provide any guidance for determining the fair market value of tokens that are not listed on an exchange. In such cases, the general rules of taxation apply, and the taxpayer must make a good faith effort to determine the value of such tokens by considering all the relevant factors.
The income, if any, of a holder on the receipt of tokens in a hard fork or airdrop or as a reward should be treated as ordinary income as there is no sale or exchange of a capital asset that resulted in such accretion to wealth. The basis in the tokens received should be equal to the amount included in income.
The tax treatment of a soft fork may be different because the holder of the original tokens generally must exchange those tokens for the new tokens to preserve any value. FAQs issued by the IRS on October 9, clarified that soft forks do not result in a division of the ledger and thus, no new cryptocurrency is created in soft forks.
A foreign issuer generally can avoid U. However, some or all of the income of a foreign issuer can be subject to U. As a general rule, gain on a sale of personal property by a foreign person is sourced to the jurisdiction of the seller.
Notwithstanding that a foreign issuer might avoid U. First, if the IP was developed in the U. While the dividing line is blurred, a person generally will be a trader rather than an investor in cryptocurrencies if its trading is frequent and substantial. Income or loss of dealers in cryptocurrencies will be ordinary in character.
Cryptocurrencies held by an investor or a trader generally will qualify as capital assets and gain or loss from their sale or other disposition generally will constitute capital gain or loss, which will be short or long term depending on whether the cryptocurrency sold or disposed of was held for more than one year.
As a general rule, income from the sale of personal property other than inventory by a U.
As fascinating as cryptocurrencies are, they are not necessarily perfect. So depending on the types of an upgrade, the nodes may need to undergo the updates to remain within the same blockchain. If the upgrade is backward-compatible, meaning that a node may not need to update the blockchain to remain within it, this is known as a soft fork. A hard fork is completely different and rather more complicated. Ethereum has been through various forks throughout its history, including the most recent forks Ethereum Berlin hard fork and the upcoming Ethereum London hard fork on the mainnet.
This begs the question: How sustainable is the Ethereum network going to be? How will it impact the network transaction fee that is prone to congestion on the network? There are several implications to the introduction of hard forks. The same cannot be said about hard forks. Another implication of hard forks comes into play if a rather considerable portion of the network is not satisfied with the new updates. Nodes may choose to remain in the non-updated, original blockchain, while the ones that update stay in the updated one.
This separation may cause the creation of a new cryptocurrency. This was the case with Ethereum Classic. To keep this from happening again, Ethereum created a hard fork that involved various changes, including a future transition from Proof-of-Work PoW to Proof-of-Stake PoS.
A portion of the total nodes in the network at that time did not want to undergo such changes remained in the original Ethereum blockchain, now known as Ethereum Classic. But this has not been the only hard fork that Ethereum has had. For example, the most recent Ethereum hard fork includes the Berlin hard fork in April The next hard fork which will occur in the Ethereum network is the long-awaited London fork. All of these forks are planned to be the stepping-stone for the major upgrade of Ethereum, Ethereum 2.
Ethereum 2. This update has three main phases. Phase 0: It was implemented in December and introduced the Beacon Chain. The main reason for this update is that PoS has proven to be more efficient than PoW in terms of energy usage. This, in turn, has repercussions for the environment because a PoW cryptocurrency is more likely to waste energy and leave carbon footprints.
Phase 1: Ethereum plans to integrate shards into the Ethereum network and connect them with the Beacon Chain. Such shards can increase the performance rate in the Ethereum network. Phase 2: It involves the full utilization of the shards and makes the current Ethereum blockchain one of the shards of Serenity.
As mentioned, such updates need to happen gradually because drastic changes may result in negative outcomes. Because of this, forks such as the Berlin hard fork were rolled out first. It involved gas fee reduction in the Ethereum network. This was relatively beneficial for users as they needed to pay less in ETH for running services on the Ethereum network. This is done through a function known as modular exponentiation, or simply ModExp.
EIP involved a new function known as the typed transaction envelope. With this function, Ethereum transactions are backward-compatible. This was a proposal that involved the increase of gas prices in Opcodes. In the past, since such gas fees were cheap, there have been attempts for denial-of-service DoS attacks using Opcodes. To lessen this possibility, Vitalik Buterin increased gas fees considerably.
Note that this happened before the Berlin hard fork. Lastly, this update involved a new type of transaction, which includes a specific list of addresses. The addresses in this access list can trade using much smaller gas fees.
If a user wants to trade with someone outside the access list, the gas fees are a little higher. The Ethereum London hard fork rollout is scheduled for its deployment on the Goerli testnet on June Following that, it will be launched on the Rinkeby testnet on July 7, and to fully deploy EIP on Ethereum mainnet at the end of July. This is a zero-knowledge cryptography—where each party in a transaction can verify the other, but the information cannot be seen—that is increasingly becoming the privacy standard for cryptocurrency transactions.
The update introduced mathematically intensive computations that enabled systems to prove that they held the requisite cryptographic keys without divulging the contents of those keys. Transactions change the state of the blockchain, and smart contracts execute transactions. When miners or validators open new blocks on a blockchain, it's possible for more than one block to be mined at the same time due to the distributed nature of the blockchain.
When this happens, the network chooses which block to add to the chain. In Ethereum, the blocks that are not chosen are called ommer blocks—ommer is the gender non-specific term for a child's parent's sibling. To understand this concept, imagine that block 24 and 24a were mined at the same time—consider them to be siblings.
Block 24 was added to the blockchain. Block 25 is block 24's child, which makes block 24a 25's ommer block parent block's sibling block. Previously, ommer blocks were not accounted for when the difficulty was adjusted. This update included ommer blocks in the block count to ensure the difficulty could not be manipulated by adjusting the ommer rate previously called the uncle rate. Under Ethereum's proof-of-work, ommer blocks also receive a cryptocurrency reward, but it is much smaller than the reward given for the block that is added to the blockchain.
Ethereum has been working towards implementing a proof-of-stake PoS consensus mechanism since it was developed. PoS hasn't been as easy to implement as other upgrades because many changes were required. It also requires users to stake their ether ETH as collateral for the privilege of becoming a network validator.
The difficulty bomb is a significant increase in mining difficulty, designed to discourage the energy-intensive mining for rewards. It will be introduced with PoS, but it was delayed in the Byzantium update.
Ethereum is an open-source project funded by the Ethereum Foundation and developed by a community of enthusiasts and developers. The blockchain isn't owned by any country or person. How many ETH can be mined depends upon your hardware, its hashrate, the block reward, and the Ethereum difficulty at the time you're mining.
When proof-of-stake is implemented, there will be no more mining for ETH rewards on the Ethereum blockchain. Investing in cryptocurrencies and other Initial Coin Offerings "ICOs" is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions.
Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no ETH. Ethereum Foundation Blog. Ethereum Foundation. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. What Was the Byzantium Fork? How It Worked. Key Takeaways A blockchain hard fork is a change that introduces incompatibility between the new and old blockchain.
The Byzantium Fork was an update to Ethereum's blockchain and network that implemented changes for the existing and upcoming frameworks. There were eight changes in the Byzantium Fork. When Did Ethereum Hard Fork? What Country Owns Ethereum?
Integrated With CB & Most Exchanges. huge.crptocurrencyupdates.com® Makes Filing Taxes For Crypto Easy. In answers 22 through 24 of the guidance, the IRS clarified that “. If a certain cryptocurrency that you are holding goes through a hard fork which “occurs when a cryptocurrency undergoes a protocol change.