Income tax you never earned? This is possible after the Ethereum merger

IRS rules were not ready for Ethereum upgrade. This is unlikely to become the fiasco taxpayers experienced when Bitcoin forked in 2017, but there are steps they can take to prepare for whatever the IRS decides.

Opinion

After much accumulation and preparation, the Ethereum merger went well this month. The next test will be during tax season. Cryptocurrency forks, such as Bitcoin Cash, have created headaches for investors and accountants in the past.

While there was progress, the US Internal Revenue Service rules were still not ready for something like the Ethereum network upgrade. Nevertheless, there seems to be an interpretation of the IRS rules that tax practitioners and taxpayers can adopt to achieve simplicity and avoid unexpected tax bills.

How Bitcoin Cash Shattered 2017 Tax Returns

Due to a block size disagreement, Bitcoin forked in 2017. Everyone who held bitcoin received an equal amount of the new forked currency, Bitcoin Cash (BCH). But when they received it, it caused some problems.

Bitcoin Cash was first issued in the fall, but only hit Coinbase or other major exchanges in December. By then, its value had increased significantly. For tax purposes, receiving free coins is income. Suddenly, many investors had a lot of income to claim that they hadn't anticipated.

Related: Prepare for a swarm of incompetent tax officials in 2023

Many crypto-savvy accountants have advised their clients to claim the value of Bitcoin Cash when it is issued, not when it finally arrives in their exchange accounts. No IRS guidance explicitly said it was OK - in fact, it goes against the accounting principle of dominance and control - but it seemed like the only reasonable way to handle the problem.

Airdropped ETH proof of work is another gray area

Due to Bitcoin Cash income reporting issues, the IRS issued Tax Ruling 2019-24 to address the processing of blockchain forks. According to the decision, the forks that drive ...