The United Kingdom Tax Authority (HMRC), has updated its taxation guidance to reference the much anticipated Ethereum Upgrade, known as “The Merge”.
Once The Merge is complete, Ethereum will complete one of its biggest milestones to date. Ethereum’s blockchain will transition from proof-of-work to proof-of-stake.
The update is set to abandon traditional “proof-of-stake” methods that use computers with powerful graphics to solve math puzzles in order to run the network and create new currency. Instead, the Merge will aim to implement a system where Ethereum owners will be able to stake the coin (proof-of-stake), in order to power the network.
This update will have a drastic effect on the world-energy cost that takes to mine Ethereum.
With this major upgrade, many are left wondering if there will be any government taxation updates regarding the merge.
United Kingdom Tax Authority Taxation Updates
The British government issued a guideline regarding its taxation rules for the Ethereum merge.
The important key point to take from the HMRC report is that the British government will not consider Ethereum “pre-merge – post-merge” as a taxable event. According to the UK Tax Authority, the transition classifies as a “One-Way” transfer, therefore not taxable.
Transferring tokens between distributed ledgers
The guideline states that since tokens are not able to be transferred from one distributed ledger for one crypto asset to another distributed ledger for a different crypto asset without performing a swap ( a transaction through a smart contract and secure public address), “the merge” will not be considered as a transfer of tokens.
HMRC also clarifies what is considered a “one-way” transfer.
Given that it will be impossible to transfer Ether from the previous mainnet to the new one after the upgrade, the British government considered this as a “one-way” transfer, meaning that the transfer will not be considered a taxable event.
“An example of this can be seen with the Ethereum blockchain. Currently, ether are on the Ethereum ‘mainnet’ (short for main network, the main public Ethereum blockchain). Holders of ether can choose to transfer their tokens from the mainnet to a different blockchain called the ‘Beacon Chain’.”
The Merge Date
According to reports from Ethereum’s team of developers, the upgrade is expected to take place around September 15th.
The much-anticipated upgrade is the cause of great anxiety for cryptocurrency investors. Given that we are this close to the mark, any updates or delays about the merge can significantly affect Ethereum’s price value.