Learn crypto tax basics
Ethereum’s Shapella upgrade will finally allow ether holders to withdraw their staked ETH. [Image courtesy of Liam Cobb]
There’s never a dull moment on the blockchain. Here’s what you need to know this week:
Ethereum’s next upgrade will enable staked ETH withdrawals. The Shapella upgrade is scheduled to go live on April 12.
Crypto tax basics to help you start. Let’s review what kinds of crypto activities you need to report.
Noteworthy numbers. Bitcoin’s percent increase during the first quarter of 2023, and other key stats to know this week.
STAKE IT OR LEAVE IT
What does Ethereum’s Shapella upgrade mean for ETH holders?
Last September, the Ethereum blockchain completed the Merge, its years-long upgrade from Proof-of-Work to the 99.95% more energy-efficient Proof-of-Stake system. While the update was a major milestone for Ethereum’s underlying economics and scalability, one key loose-end remained — the ability to “unstake” (withdraw) staked ether. Now, the Shapella upgrade, scheduled for April 12, aims to finally enable holders of staked ETH to withdraw their assets.
Here is what you need to know about Shapella and what it means for ETH holders and the future of the Ethereum network. Let’s dive in.
What is the Shapella upgrade?
Shapella refers to the simultaneous Shanghai and Capella upgrades, slated to go live next week on April 12. Shanghai will update Ethereum’s “execution layer” — the part of the blockchain that includes smart contracts and protocol rules. Capella will update the “consensus layer” — the part of the network that ensures validators are following those rules.
Shanghai will primarily enable users to withdraw staked ETH and staking rewards, which have been accumulating on Ethereum’s blockchain since December 2020. More than $32 billion worth of ETH is staked and locked into Ethereum’s Beacon Chain — around 15% of the ETH’s circulating supply.
Capella is a concurrent upgrade that applies to network validators — the primary goal is to make sure Shanghai succeeds.
How do you withdraw staked ETH?
Coinbase customers who want to unstake their ETH can make unstaking requests within roughly 24 hours after the upgrade. All requests are processed directly on-chain, meaning Coinbase will pass unstaked ETH to customers once it's released by the Ethereum network. The Ethereum network could take weeks to months to process unstaking requests immediately following the upgrade. (Learn more).
Other staking intermediaries (like exchanges and protocols), should also enable staking withdrawals at varying dates in the subsequent weeks and months after the upgrade.
Validators who participate directly in on-chain staking will have a more manual process and should check out the Ethereum Foundation’s instructions.
What could happen to ETH’s price after Shapella?
Some crypto researchers are anticipating short-term price volatility as the market could see more ETH withdrawals — remember that $32 billion of staked ETH is currently locked up.
But there likely won’t be excessive selling pressure due to guardrails in place to prevent all validators from leaving simultaneously, incentive structures for validators, and the fact that staked ETH comprises a minority (15%) of the network’s circulating ETH supply.
Many also see long-term benefits, including Bernstein researchers, who recently opined that the “Shanghai upgrade may attract some additional staking from institutional investors.” Elsewhere, several analysts told Blockworks they expect that the upgrade may contribute to greater price stability, while one expects “more not less ETH to be staked in the medium-to-long term.”
Why it matters… The Shapella upgrade is the first major milestone for Ethereum after last year’s Merge, but it’s the first of many. Ethereum still has an impressively detailed, years-long roadmap, which includes an eclectic mix of rhyming phases, and sci-fi sounding scalability upgrades. Before the Merge, ETH creator Vitalik Buterin said he considered “Ethereum to be 40% complete” — so how much closer to completion does he consider his invention now? We’ll ask him next time we talk to him.
BRASS TAX
Which crypto transactions are taxable (and which aren’t!)
If you’re one of the 20 percent of Americans who own crypto and you’re unsure how to report certain transactions on your federal income tax return, now’s the time to learn. The last thing you want is an “educational” letter from the Internal Revenue Service (IRS) asking for back taxes or interest because of improperly reported crypto transactions. With our help, you’ll be able to file confidently and set yourself up for success. Here are some key basics you’ll need to know.
Many types of crypto transactions are taxable events, each with its own set of rules and exceptions. If you sold, converted, spent, earned, or staked crypto, for example — you’ll need to report your transactions to the IRS.
Your crypto gains are taxed at different rates, either as capital gains or as ordinary income, depending on how you got your crypto and how long you held on to it, among other factors. The IRS treats selling crypto a lot like selling stock — you’ll generally pay a lower rate if you held onto it for a year or more before you sold it.
Converting crypto, like swapping BTC for ETH, is taxable. This is because you’ve technically sold your BTC to buy ETH, “realizing” either a gain or a loss. Same goes for spending. If you bought $10,000 in BTC and, after its value increased to $30,000, used your BTC to buy a car worth $30,000 — you’ll have a taxable gain.
Simply buying crypto with cash isn’t taxable, so you won’t have to report it on your federal tax return. You also won’t need to report transferring coins between wallets you own or gifting up to $16,000 (for 2022) in crypto to a friend or family member. And if you’ve donated crypto directly to a 501(c)(3) charitable organization, you might even be able to claim a deduction according to the latest IRS guidance.
Why it matters…. It’s important (and legally required!) to report your activity and pay the necessary taxes. The penalty for getting this wrong may be steep, so be sure to consider all your crypto transactions. If you’re a Coinbase customer, check out our tax reports and tools, or use a trusted aggregator like CoinTracker to organize your taxable crypto activities. And if you’re having trouble navigating your tax situation on your own, please consult a professional.
TAKES
Elon Musk’s lawyers defend his ‘silly’ Dogecoin memes, and other key quotes from the week
Crypto No-Go… “Without a significant change of course by the Biden administration, the view that the U.S. is anti-crypto will soon become too entrenched to uproot,” was how Coindesk’s Editor in Chief described the state of crypto policy talks in the U.S. last week, after a report from the Biden administration dismissed crypto as having “no fundamental value.”
DOGE the Issue… “There is nothing unlawful about tweeting words of support for, or funny pictures about, a legitimate cryptocurrency that continues to hold a market cap of nearly $10 billion,” argued Elon Musk’s lawyers in court as they try thwart a $258 billion lawsuit accusing Musk of running a pyramid scheme focused on inflating the price of DOGE. Musk’s lawyers went on to defend his “innocuous and often silly tweets.” On Monday, Twitter, which Musk owns, changed its logo from its iconic blue bird, to Dogecoin’s Shiba Inu logo.
Water Works… “We had a down year in [my charity] water.org and I did that commercial in an attempt to raise money,” is how Matt Damon recently defended his widely panned 2022 Super Bowl commercial for Crypto.com. He said the exchange donated $1 million to the charity, which helps people in the developing world access clean water.
NUMBERS TO KNOW
$4 trillion
The projected value of tokenized securities by 2030, according to Citi. Analysts from the bank say that tokenized securities could become the use case that leads to one billion blockchain users. Mass adoption, per Citi, is dependent on innovation in new areas like decentralized digital identities and clear regulations that foster adoption and scalability.
$108 million
The size of the latest fundraising round by Ledger, the Paris-based crypto hardware wallet startup. Ledger, which sold one million hardware wallets between June 2022 and February 2023, estimates that their products secure 20% of all crypto and 30% of all NFTs globally.
70%
The percentage that Bitcoin’s price rose during the first quarter of 2023, far outpacing the S&P 500’s 7% increase over the same span. The recent bank turmoil, combined with increasing hopes from investors that the Federal Reserve will slow its rate hikes, have helped to buoy BTC.
DISCLAIMER
This material is the property of Coinbase, Inc., its parent and affiliates (“Coinbase”). The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Coinbase or its employees and summarizes information and articles with respect to cryptocurrencies or related topics that the author believes may be of interest.
TOKEN TRIVIA
Which of the following is taxable as income?
A
Getting paid in crypto
B
Receiving an airdrop
C
Earning staking rewards
D
All of the above
Find the answer below.
Trivia Answer
D
All of the above
