Skip links

Tax Consequences of the Ethereum Merge

What are the potential tax implications of the Ethereum Merge, you ask? CryptoCFOs answers your questions here.

As the underlying asset, ETH did not change through The Merge process, resulting in no direct taxable impact from the transition to proof-of-stake (PoS) consensus. 


If you locked your ETH in the staking contract pre-merge, you received ETH as a reward. The most conservative treatment of staking rewards (and current guidance from the IRS) is that these rewards be treated as ordinary income at the time of receipt. However, the question of “ dominion and control” over the asset comes up, and as the staking rewards are locked until the post-merge upgrade (or beyond), stakers receiving rewards do not have “dominion and control” over these rewards. By dominion and control, we mean that the people earning these rewards have no way to direct, spend, trade, or use these funds. As a result, it could be argued that ETH stakers do not have constructive receipt of the ETH rewards and thus do not have ordinary income until these rewards are unlocked and available for withdrawal. NOTE: We are not recommending this position, simply stating a nuance we feel isn’t taken into account with the original guidance from the IRS.

ETHPoW Hard Fork

Indirect tax implications in certain cases as a result of The Merge must be considered as well.

Shortly after The Merge was completed, a group of miners who wanted to preserve a proof-of-work (PoW) version of ETH created a hard fork of the main Ethereum chain known as ETHPoW or ETHw. This hard fork resulted in an airdrop of ETHw tokens to anyone holding ETH in a non-custodial wallet at the time of the fork. With a hard fork, an entirely new network is created, while the wallet balances and transaction history before the fork remain intact. So in effect, if you held ETH in a wallet like MetaMask, you would need to add the ETHPoW network to be able to access your ETHw.

Treatment of Hard Forks

For a historical example of how we should treat this hard fork, we can look at a similar situation from 2017, the Bitcoin cash (BCH) hard fork.

In 2017, leaders in the Bitcoin community disagreed about who should be able to validate transactions, the efficiency of the network, and whether Bitcoin was meant to be a transactional currency or investment and store of value. Larger block sizes meant more data (transactions) could be carried in each block, making the network more efficient from a cost-per-transaction perspective but more costly to run a node because more resources would be required. The two sides could not come to a consensus on these issues, and as a result, the network was “forked.” At the time of the fork on Aug. 1, 2017, BCH was airdropped at a ratio of 1:1 for all BTC held. On that day, the price per BTC and BCH was $240.

Hard forks involve a protocol change that permanently diverts a cryptocurrency from its distributed ledger of origin. If such diversion results in a new cryptocurrency, you have taxable ordinary income at the moment you have dominion and control over this new cryptocurrency, whether you dispose of it or not. This rule may seem unfair as one might compare a hard fork to a stock split, which is not a taxable event, but this is where current guidance leaves us (remember, the IRS treats digital assets as personal property for tax purposes, not as currency or a security/ stock). 

The IRS addressed the taxability of hard forks in Revenue Ruling 2019-24 and then again in Chief Counsel Advice 202114020. These documents rely heavily on three fundamental concepts in determining the tax treatment of a hard fork:

  • Internal Revenue Code § 61 – Gross income is defined: “…gross income means all income from whatever source derived…
  •  A 1955 U.S. Tax Court Opinion, “Commissioner v. Glenshaw Glass, Co.”, “Here, we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”
  •  IRS Regulation § 1.451-2 – Constructive receipt of income. The concept that income must be available to the taxpayer to be taxable.

Note that the Tax Court’s “opinions” are precedent-setting. While an IRS Revenue Ruling can be cited as a precedent by taxpayers in comparable situations, Chief Counsel Advice (CCA) issuances are not precedent-setting.

Taxation of a fork comes down to the taxpayer having “complete dominion” over the newly created cryptocurrency. Once the taxpayer has the ability to dispose of the new crypto, they have to recognize its fair market value (FMV) as income when received. Revenue Ruling 2019-24 specifies that you recognize this income once you have constructively received it, specifically once you can “transfer, sell, exchange, or otherwise dispose of it, which is generally the date and time the airdrop is recorded on the distributed ledger.” There may be instances where a hard fork results in a new cryptocurrency but the taxpayer does not yet have dominion and control over it. Where the taxpayer cannot access or dispose of the new crypto, it is not constructively received and is not yet taxable income. 

Hard Fork Tax Example

This situation happened to users of Coinbase on Aug. 1, 2017, during the Bitcoin hard fork resulting in the creation of Bitcoin Cash (BCH).

Instead of receiving Bitcoin Cash as taxable income where it began trading at around only $240 USD on Aug. 1, 2017, Coinbase users received BCH 20 weeks later on a day with a trading range of about $2,161 to $2,919 USD. From Jan. 11, 2018, to the time of this writing, BCH has not exceeded $2,919, meaning that if you did not dispose of it within the 24-day window following Coinbase supporting it, you had a much larger tax liability in 2017 caused by the hard fork than those who received control of their BCH on August 1, but you had no loss to offset it until 2018.

As a result, if you received ETHw via an exchange, you would need to take the FMV at the time it was received ( and for FMV) and multiply that by the amount of ETHw you received to calculate the ordinary income that you will have to report to the IRS in 2022.

Finally, if you held stETH, rETH, or another form of liquid, staked ETH, the tax treatment will largely be determined by how rewards accrue. Ultimately it depends on how rewards are distributed. For Rocketpool’s rETH, rewards get built into the price. As a result, you would only need to recognize capital gains (proceeds less cost basis) when you dispose of your rETH. This attribute of the rewards accumulating into the price of rETH relative to ETH gives the investor greater control from a tax planning perspective.

TLDR: If During The Merge You:

  • Held ETH on an exchange that didn’t support the ETHw fork – Likely no tax impact
  • Staked ETH before The Merge (either through a central entity/solo staking) and cannot access or direct the rewards – IRS guidance says these rewards are taxable, so this is how we recommend treating them, but an argument could be made that since there is no constructive receipt of these rewards until they are unlocked in the subsequent post-merge update.
  • Held ETH in a non-custodial wallet – You likely have ordinary income for ETHw received
  • Held liquid staking tokens that distribute rewards or use rebalance – Any Staked earnings available/accessible by you are ordinary income.

Held liquid staking tokens where rewards are BUILT into the price (rETH) – Capital gain at the time of sale or disposition of the asset.

We use cookies to provide the best web experience possible.