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All cryptocurrencies are all set for the long-awaited Ethereum merger, which will begin on September 6.
It’s a huge event, given that even a minor flaw can negatively affect about $64.8 billion in value held in the famous blockchain, not to mention its reputation. But among all this, is there anything investors need to prepare for?
Hard fork contents
Should all go according to the book, investors don’t need to fear taxmen. However, they only enter the picture if ETH passes through a hard fork. Essentially, this involves splitting one cryptocurrency into two tokens. Think ETH and ETH Classic, 2016.
This usually happens when members of the crypto community in question (ETH, in this case) want to decouple from the existing blockchain. This may be due to many reasons – deficiencies in the chain, speed or insufficient functionality.
When this happens, the investors of the original blockchain receive tokens from the new chain as well. However, miners have to make a call regarding which blockchain they will continue to work on. Now, ETH is completely switching to the Proof of Stake (PoS) model, which will consume 99.95% less power.
This has left Proof of Work (PoW) miners indignant, given that they are investing heavily in the infrastructure needed to run the power-devouring PoW mechanism. Then there is the issue of drastically reducing their bonuses.
The Proof of Work (PoW) chain used to pay around 13,000 ETH to these miners on a daily basis. Once ETH moves to PoS, validator payments will drop by 88% to 1,600 ETH per day.
Edul Patel, CEO and Co-Founder, Mudrex, a global crypto investment platform, explained, “Previously, miners were validating the transaction process in PoW. Now, miners need to adopt the change of POS. If it happens without any issue with the validators taking over, then the miners need to approve the change of points of sale. There will be no tax as the POS tokens will be considered the same as the assets on the Proof of Work.”
What about regular investors?
Is there anything regular investors should be looking for?
In the event of a hard fork, ETH investor tokens will also be airdropped from the newly forked chain. This will subject them to a 30% tax on its value, according to the current crypto legislation in India.
However, Archit Gupta, founder and CEO of ClearTax, emphasized that there is nothing to worry about. Most on-chain DeFi projects support merging. This will likely translate into massive support, as 80% of all decentralized applications in the ecosystem are based on the Ethereum blockchain.
“If you own some ETH, whether it’s in a wallet or on an exchange, you don’t need to do anything. The transition carries certain risks. However, if all goes well, it will just transition, and ETH will continue to function as before. without any pause.”
“The transition will not affect investors who hold ETH, whether the price of Ether is moving up or down. According to the income tax rules, the tax event will only happen when there is a cryptocurrency transfer. The merger will only upgrade the Ethereum platform, and there will be no change in ownership of the Ethereum platform. ETH for the investor.
Shashi Matthews, Partner, IndusLaw, agreed. “Since the merger does not lead to the issuance of any new cryptocurrencies to the users, it is unlikely that there will be any tax implications on the expense of this event, in the hands of the users. However, all the major exchanges have been preparing for this once-in-a-lifetime event in the world. Crypto. The system itself has undergone various tests and delays to ensure that there is no blocking of funds or any disruptions to the blockchain. However, users should be wary of any offers to increase their funds or double their ETH during this period.”
However, Raghav Kumar Bajaj, an advisor to Khaitan & Co, feels investors should be wary of VDA provisions here, in the event of a sharp split. The long-awaited ETH merger will be important to investors from an income tax perspective as well. The primary considerations to be examined in this regard are whether or not this event will fall within the scope of ‘transfer’ for the purpose of the Indian Income Tax Act and whether or not it will result in the receipt of a new token by investors,” he signs.
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