Tax: You May Owe Money for Receiving an Airdrop you Likely Didn’t Want

Tax struggles are real. If you’re an Ethereum holder in the United States, you may owe taxes for receiving an airdrop you likely didn’t want.

In September 2022, the Ethereum network migrated from using the Proof-of-Work consensus method to Proof-of-Stake. As a result, disgruntled Ethereum miners created their own fork of the Ethereum blockchain that continued to rely on Proof-of-Work. Their ‘new’ coin, ETHW, was airdropped to existing Ethereum holders. 

The Ethereum Proof-of-Work (ETHPoW) fork illustrates why crypto tax policy in the United States needs reform. While countries like Australia, the United Kingdom, and Germany will treat the fork as non-taxable, American ETH holders may be required to pick up ETHW as income — whether they want the airdrop or not. 

Is the Ethereum Merge taxable?

Generally, there’s no taxable event for simply holding your cryptocurrency. The same concept applies for holding your Ethereum through the Merge. 

In this case, no new token is created and the old chain ceases to exist. Your basis and acquisition date in any ETH you own would stay the same and carry-over to your upgraded ETH tokens.

How the IRS will treat the ETHPoW fork

If you received ETHW from the fork event, you’ll be required to pick up income based on the fair market value of the coins at the time of receipt. 

In the United States, the IRS has issued guidance for how to treat the receipt of a new token as a result of a hard fork. The guidance is clear: if you receive a new token as a result of a hard fork, you have income to pick up equal to whatever the fair market value is at the time of receipt. 

Tax: The problem with the U.S. crypto tax policy

The U.S. approach to taxation of hard forks – income when the token is first received – is problematic for many reasons.

The vast majority of ETH users will never participate in this forked PoW chain. For users who want to use the main Ethereum chain, there is no need for the for