Weekly Top 3: September 16

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In this edition, you can learn more about the tax implications of the ETH Merge, the global crypto tax ranking for the year, and how the LUNC Burn Tax affects your crypto taxes. Visit our blog to find our previous editions in?German?or?English, or?download our app?and create an account to start tracking your whole crypto portfolio for free!

The Tax Implications of the Ethereum Merge

Ethereum’s long-awaited merge just arrived this September, switching the network from the energy-intensive Proof of Work consensus mechanism to a Proof of Stake one, marking the end of the energy-intensive mining era. The objective was to integrate the Ethereum Mainnet with the Beacon Chain, being a protocol upgrade with the approach of establishing a new consensus mechanism to determine the legitimacy of transactions, relying on validators to verify them and add new blocks. If you are an Ethereum user, you don’t have to do anything as the migration from one consensus mechanism to another will be done automatically.?

When it comes to your taxes, the merge itself has no tax implications since it’s an update of the network, similar to a fork. Some other events, though, could be taxable, such as converting ETH staking. Furthermore, there are tax implications you must keep in mind related to the staking of ETH 2.0, general staking (or saving) rewards, as well as swapping ETH for other assets. All of these as taxed as income. The merge will pave the way for devs to build more apps and add tons of new features on the Ethereum blockchain.

Coincub Publishes Global Crypto Tax Ranking 2022

In a recently published study, Coincub analyzed which countries around the world offer domestic investors the best tax environment based on various factors. Followed by Italy, Switzerland, Singapore, and Slovenia, Germany ranks first based on its progressiveness and the efforts of the Ministry of Finance to create tax regulations for cryptocurrencies. Moreover, profits from long-term investments of more than one year are tax-free, which is beyond doubt very attractive for investors and fits perfectly with Germany’s traditionally high savings rate. On the other hand, with a tax rate of 33% on crypto profits and up to 50% for commercial investors, Belgium lands in last place behind Iceland, Israel, the Philippines, and Japan. India, with its recently introduced transaction tax of 1%, which is currently significantly affecting investors’ trading activities, is also positioned at the end of the list.

Tax Haven Bahamas Also Attractive for Crypto Investors

There are no taxes on profits with cryptocurrencies, and the Bahamas are also a lucrative tax destination for companies. However, investors considering emigrating to the Bahamas should inform themselves about the tax consequences and clarify whether there are double taxation agreements between their native countries and how cryptocurrencies are handled.

How Will the LUNC Burn Affect My Taxes

While this week’s market has been somewhat of a rollercoaster, with the CPI report and the ETH merge both making headlines, one coin that has unexpectedly outperformed the rest is?Terra?LUNA Classic (LUNC). Between the community taking over the project and the 1.2% burn tax, there has been a lot of hype about possible price action for LUNC. But don’t forget to always consider the potential tax implications of burning coins!?

For anyone who had the misfortune of accruing losses with the collapse of Terra LUNA, you can always deduct any realized losses from your capital gains if you disposed of or sold the Terra LUNA at a loss. Any?airdrops?that followed have to be reported based on the fair market value at the time that you received the new coins, while any gains due to the recent price appreciation of LUNC are the same as all other gains – taxable once you sell the coins.

But what happens to the 1.2% burn tax on every transaction? Unfortunately, this is not something that you will find official guidance for. Two different approaches could apply. The first approach is to treat this tax just like any other cost, such as gas fees, and to add it to the tax basis of the assets you receive. So, while you may receive less LUNC due to the tax, your tax cost includes what was burned, and can only realize a tax benefit when you sell these coins. The second would treat it as a disposal event at the time of the disposal since you no longer have the coins, but you’re essentially disposing of them.

Based on the IRS FAQs question #8, we would argue that this tax is an acquisition cost of LUNC. Therefore, you must include it in your tax basis. If you sell LUNC, would this cost become a reduction of your proceeds or a cost to acquire a new asset? This is yet another case of applying old tax principles to new technologies – as you can see, options exist based on the interpretation of the guidance provided by the tax authorities. For this reason, if you have a substantial amount invested, it is always recommended to seek a tax advisor.