Ethereum’s Merge Triggers Confusion Over Tax Status In The UK: Here’s How

• The Ethereum Merge has complicated tax obligations for investors and digital asset exchanges.
• UK’s tax authorities are not left out of the headache as most citizens are not expected to file taxes annually.
• Ethereum staking will become mainstream in the UK with a tax framework already rolled out by authorities.

Virtual currency regulation may take a new turn following Ethereum’s Merge event as more countries impose new tax regulations on users and exchanges.

The Merge has seen the Ethereum (ETH) network transition to a Proof-of-Stake (PoS) model which replaces miners with validators requiring them to lock up assets to add new blocks to the chain with profits coming from those assets. The model which means validators will earn yield has now come under the tax net of many countries.

In the UK, not everyone is required to file yearly taxes creating a sort of confusion on citizens filing only crypto tax. If Eth stakers pay their taxes annually, it creates a huge burden for the UK tax authorities to account for only crypto tax while others are being filed differently. 

David Wren, a tax partner at EY, UK expressed his concern stating that the tax authorities “are going to give themselves quite a big headache if they suddenly require a lot of people to file tax returns just for their crypto.”

The UK is ahead of other countries in crypto tax regulations with an established model which places more responsibility on the companies like exchanges to identify taxable income from the assets it holds. This further creates a problem for the exchanges that engage in crypto staking because all the funds are lumped together.

With ETH staking on the rise, a third of all funds staked are on exchanges keeping the eye of regulators on them. Users are required to stake 32 ETH to participate with about 12% of ETH in circulation already staked.

Taxation in crypto

With the mass adoption of digital assets, government agencies hopped in to regulate the sector through guidelines and taxation. Taxation in the industry, in the long run, is a step in the right direction because it paints a picture that digital assets are supported by the government and gives potential investors a measure of assurance.

However, it can be seen that regulators roll out tax policies that may not be feasible considering the peculiarities of digital assets. The UK guideline has been criticized by industry players like Ian Taylor, the head of Crypto UK as “full of problems, overburdensome, and very difficult to value and enforce.”