1/19

Dear ETH Friends,

If you are concerned about the outlandish claim that "ETH2.0 Staking is for sure a taxable event" then you'll want to read this thread

2/19

First, note that this isn't tax advice. There is no guidance on this specific case, so no one can be 100% sure, and state, federal and international treatment may differ.

But, we can take guidance from similar cases that we've seen in the past.

3/19

Second, make sure you consider the difference between natively depositing ETH into the ETH2 launchpad contract and running your own validator, vs depositing via an exchange.

4/19

If you deposit via an exchange, it is a bit dicey on taxation. It ultimately depends on how the exchange represents that.

If they just show you that you have a locked stake balance? You're likely fine.

5/19

If they have a tradable market for that locked balance, but you can't withdraw some token. Then it's a grey area.

If its tokenized? It's quite possibly a taxable event. This is an open question and depends on how material different it behaves from actual ETH.

6/19

For example, swapping ETH<>wETH does not create a taxable event as they are materially the same.

Even though we have ETH/WETH markets with a small delta, they are mostly the same.

7/19

Another example is the swap from USD to USDT or USDC - it isn't taxable when swapping at a 1-1 rate.

However, if you traded it instead and received a profit (1 USDT for $0.99 USD) then the tax exists on the capital gain/loss of $0.01

8/19

Now, if you deposit it yourself and run your own validator.

This is akin to an update or software migration.

The American Institute of CPAs (AICPA) had released a 2018 guidance on Virtual Currencies (notice 2014-21)

9/19

In section 6(d) of that guidance they noted that token swaps on a 1:1 ratio basis are not a taxable event.

Token swaps on a non-1:1 ratio didn't create a taxable event but would adjust one's cost basis for figuring out later capital gains/losses.

10/19

Since 2017 we've had a number of migrations/swaps including:

EOS
KIN (3x)
BNB
SAI -> DAI
DAI-CSAI
SJCX->STORJ
Shadow Cash - Particl

And in that time the AICPA has held their stance on the matter of swaps not being a taxable event.

11/19

Also in that time, there has been no contrary guidance from the IRS.

And that brings us to the most important point about taxes:

It's not illegal to get your taxes wrong.

It's only illegal if you get it wrong on purpose.

12/19

Taxes are confusing and guidance is unclear.

You should consult a local tax professional who has knowledge of crypto. The AICPA has volumes of books on the topic and can likely direct you.

13/19

But, if you use the best knowledge at the time, document things, consult professionals and the conclusion is that it *isn't* a taxable event - then if in the future the IRS gives clear guidance that it *IS* taxable there isn't a criminal penalty. You just pay the tax.

14/19

Not to mention with crypto, the IRS does not apply the "Wash Sale Rules" so tax lost harvesting is a possibility.

What does that mean?

15/19

If ETH2 were to trigger a taxable event and have tradable markets, you would be within legal rights to optimize your taxes through taking a capital loss& buying it back right after the tax season

Its why US crypto markets have large volume but not high vol late dec

16/19

Of course speak to a tax accountant if you plan to do something like that. Remember:

Tax optimization = legal.

Tax avoidance =/= legal.

It can be a fine line.

17/19

But, the fear mongering, mostly from maxi's is unfounded.

(Why would anyone think BTC holders are experts on tokens anyway, how many swaps have they been through?)

18/19

All you need to do is follow the best guidance you can find at the time and make honest best efforts in your reporting.

Talk to a local tax expert.

It's likely direct staking is fine.

It's possible exchange assets may need tax loss harvesting to optimize.

19/19

But, in the end, even if you did create a taxable event, you'd be paying capital gains on the profit between ETH and ETH2.

ETH2 likely won't be at a premium.

So that taxable event, if it exists, is possible a capital loss, or tax on a few dollars.

ps - not financial, legal or tax advice.

Just a recap of existing measures and guidance.

Consult a professional.