UK Tax Authority Issues Policy Update Referring to Ethereum Network Upgrade

UK Taxman Issues Policy Update Ahead Of Ethereum Network Upgrade.

Ethereum 2.0 network upgrade has triggered the UK tax authorities to update guidance for crypto regulations.

Ethereum developers have announced that the planned network merge to introduce PoS (Proof-of-Stake) functionality will occur in September this year. As this happens, Ethereum has overtaken Cardano to become the top network in terms of development activity for the month.

Now, the UK tax authority seems interested in the upcoming Ethereum 2.0 network merge. The authority has since moved to issue updated tax guidelines to cover the ETH 2.0 network upgrade.

Rules Of Token Transfer Between Different Distributed Ledgers

According to the general guidelines, digital assets (in this case, cryptos) cannot be moved from one distributed ledger to a different distributed ledger belonging to a different crypto token. For example, BTC tokens cannot be moved to the Ethereum blockchain because the two chains accommodate totally different crypto setups.

However, a “swap” can be done between the two crypto assets by first running the initial token through a smart contract in a public address. The holder has no access to the said public address. Crypto assets of the other desired token are then transferred to the address or wallet controlled by the user/holder.

Tokens Can Only Be Transferred One Way

The blockchain industry is built on the premise of token security and the users’ comfortability in knowing that their transactions are safe. As such, developers have made it hard for any tokens sent to be reversed to their originating address. This concept is now being re-captured in the updated tax policy issued by the UK’s HMRC (Her Majesty’s Revenue and Customs) authority.

“Some transfers can only go in one direction, meaning that once the transfer has been made it cannot be undone or transferred back at a future date. An example of this can be seen with the Ethereum blockchain. Currently ether are on the Ethereum ‘mainnet’ (short for main network, the main public Ethereum blockchain). Holders of ether can choose to transfer their tokens from the mainnet to a different blockchain called the ‘Beacon Chain’. The Beacon Chain blockchain is where Ethereum’s ‘Proof of Stake’ will be implemented (for more information on Proof of Stake see CRYPTO10300. It will be impossible to transfer ether from the Beacon Chain to the mainnet, making transfers a one-way process only.

HMRC’s view is that TCGA92/S43 applies to this type of transaction. The allowable costs in respect of the first cryptoasset are attributed in full to the second cryptoasset. A gain or loss will accrue as normal on a subsequent disposal of the second cryptoasset.”

Capital Gains

According to UK Capital Gains Manual:

“Where assets have been merged or divided or have changed their nature or rights or interest over assets have been created or extinguished, and therefore the value of an asset [A] is in any way derived from another asset [B] which the taxpayer owns or has owned, TCGA92/S43, see CG15200, provides that an appropriate proportion of the sums allowable on the disposal of asset B under TCGA92/S38 (1)(a) and (b) shall be attributed to asset A.

If expenditure incurred on asset B, but attributed to asset A, falls within TCGA92/S38(1)(a), for indexation purposes it is treated as incurred when asset A was acquired. See example in CG17484.

Where a LEASEHOLDER OF LAND acquires a superior interest in the same land he may be able to claim the benefit of the concessional treatment described in CG71400+, so that indexation in respect of expenditure actually on asset B, but attributed to asset A, runs from the date of expenditure. This does not apply to other assets.”

The Ethereum merge is expected to upgrade the network and make it more accommodative in terms of speed, scalability, and energy efficiency. Many experts have argued that PoS uses much less energy than PoW (Proof-of-Work) system.

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