The Ethereum blockchain in mid-September 2022 completed what was popularly dubbed the “Merge,” in which the blockchain was converted from operating on a “proof of work” model to a “proof of stake” model. While there were notable technological, operational and environmental considerations associated with this transition, it also may have important legal implications as well. Questions have been raised about whether this transition to a “proof of stake” structure could affect whether tokens will be regarded as “securities” under the federal securities laws, and what the proper tax treatment should be for persons who earn tokens through “staking” rather than as “proof of work” miners.

‘Proof of Stake’ vs. ‘Proof of Work’

The background underlying the “Merge” is that currently there are “two major types of models for blockchains—proof of work and proof of stake.” Vicky Ge Huang and Caitlin Ostroff, “What Is the Ethereum ‘Merge’?,” Wall St. J. (Sept. 15, 2022). Each represents a different approach to “how cryptocurrency transactions are verified” in a crypto world that seeks to eliminate the “financial gatekeepers” like banks which “verif[y] that one entity has enough money to make a payment to another.” David Yaffe-Bellany, “Crypto’s Long-Awaited ‘Merge’ Reaches the Finish Line,” N.Y. Times (Sept. 15, 2022).

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