The Shanghai and Capella Upgrades, collectively known as Shapella, enables you to unstake your staked ETH for the first time since ETH staking was introduced in December 2020. When fulfillment of unstaking requests begins, Coinbase will consider rewards earned from staking ETH and holding cbETH as taxable income (subject to future guidance from the IRS). Before the enablement of unstaking, staking rewards was not considered taxable since you were unable to sell or realize earned rewards.
How ETH staking is taxed
Subject to future guidance from the IRS, your ETH staking rewards are considered income, just like any other kind of staking rewards. Here’s how your ETH staking income will be reported by Coinbase:
First, as a one-time taxable event for all prior rewards earned, on the date when fulfillment of unstaking requests begins
ETH staking rewards earned before this date will be summed up and reported as income, using the market price of ETH as of this date
Depending on how much ETH you have staked, and how long you have been staking it, this could be a significant amount of rewards that will be recognized as income in one event
Moving forward, ETH staking rewards will be considered income as they are paid out to a customer, about every 3 days, using the market price of ETH on that regular cadence
How cbETH is taxed
Holding cbETH is taxable in the same way as directly holding staked ETH. You’re earning rewards as if you directly hold the underlying staked ETH.
Subject to future guidance from the IRS, your cbETH income will be reported by Coinbase:
First, as a one-time taxable event for all prior rewards earned, on the date when unstaking requests are first fulfilled, income earned by holding cbETH will be summed up and reported as income using the market price of ETH and conversion rate of cbETH to ETH as of this date
Coinbase will only report this one-time event as income if you hold your cbETH in your Coinbase account (i.e. the Coinbase app) at the time of the upgrade
Moving forward, any income earned by holding cbETH on Coinbase will be considered income as it’s earned, about every 3 days, according to the details below
As a reminder, there are other actions you can take with your cbETH. Wrapping and unwrapping cbETH generally are not considered taxable events, and selling cbETH is taxed as capital gain or loss.
cbETH income calculation
Your income from cbETH can be calculated like this:
Income associated to your cbETH =
(quantity of cbETH) * (change in conversion rate) * (market price of ETH)
In other words, this is how much more ETH you could get from unwrapping your cbETH now, compared to the last income event (or for all time, if this is the first income event), denoted in the market price of ETH.
As your cbETH incurs taxable income, your basis of cbETH also increases. When you eventually dispose or sell that cbETH you will see capital gains or loss based on the adjusted basis.
Conversion rate: How does it determine income earned on cbETH?
At any time, a holder of cbETH can convert the token to regular staked ETH at Coinbase using a conversion ratio maintained by Coinbase. Increases in the conversion rate of cbETH to ETH represent income even as you continue to hold cbETH.
This illustration from the cbETH whitepaper shows how the conversion rate works:
Staked ETH or cbETH not reported as income prior to 2023
Coinbase hasn’t reported income from staked ETH and cbETH before this upgrade event because customers didn’t have the ability to sell or realize their ETH rewards.
When will I first see staked ETH or cbETH reported as income?
You will see staked ETH or cbETH reported as income on your end of year reports as of the day when unstaking is first supported by Coinbase. Although unstaking is enabled by the Shapella Upgrade, Coinbase will need additional time to enable unstaking on our platform. This will follow after Ethereum's Shapella Upgrade is complete.
What is the tax impact if I staked my ETH before the upgrade then wrapped my ETH2 and held cbETH?
This breaks down into two different pieces of taxable income:
Staked ETH rewards, based on however long you had staked ETH
cbETH income, based on however long you had cbETH
Meaning:
Rewards earned from your staked ETH (or ETH2) are taxable as income as of the day when unstaking is first supported by Coinbase, for as long as you held your staked ETH even if you do not unstake your ETH on this day.
As soon as you wrapped your ETH2 into cbETH, that cbETH incurs taxable income when the underlying rewards become available for unstaking
Expectations for a 1099
Coinbase issues 1099-MISCs for when all miscellaneous income earned is at least $600. For 2023, if your income earned from staked ETH rewards and holding cbETH along with any other taxable income exceeds $600, you’ll receive a 1099-MISC.
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