Under the current US tax rules, when a crypto asset is bought and later sold/converted, one must pay either short or long term capital gains on the sold/converted asset depending on how long it was held. Will going from ETH 1.0 to ETH 2.0 be considered a conversion? If so, am I correct in assuming it would create a taxable event? Can there be a case made that ETH 1.0 to ETH 2.0 is just an upgrade and it's still the same ETH coin? (Staking early on should help mitigate any taxes due to this conversion, at least) And once a validator is staking, I assume they must report staked interest received during that year as income?
No, the IRS is smart enough on crypto currency that they understand an upgrade in a chain is not a taxable event.
The revenue from staking on the other hand is well understood to be taxed though.
The fact that there will be an ETH-1 execution environment running on one of the ETH-2 shards, and therefore ETH-1 and ETH-2 will coexist makes me think that E1 and E2 will be considered different coins (not just an upgrade), and the conversion will be considered a taxable event.
Staked profit is the equivalent of stock dividend I would assume hence a taxable event, unless they decide to creat some new laws around it
I do not know how I will handle this myself, but for arguments sake…
If you believe Eth1 and Eth2 are the same asset, then staking your ETH is not a sale of one asset to another. You are simply transferring your ETH from the Eth1 network to the Eth2 network. If you are just transferring your ETH to yourself on another network, then you don't have any transactions to report to the IRS. If you don't report any transactions to the IRS, then what are they taxing you on?
Taking this approach could be trouble though if they deem it a real conversion of one asset to another, and later discover that you did this. I imagine they could discover it based on your reporting of staking earnings, but I don't know how closely they'd be looking at that anyhow.
Until there is clear guidance from the IRS on this, I am starting to lean towards my own opinion that this is a network upgrade, not a transfer of assets. At most, this is just a change in the container that is hold my share of the ETH network. The share of the ETH network I hold is the same. I have just changed the wrapper around it.
But… I will be talking to my accountant about it soon.
Disclaimer: I am not a tax professional, tax attorney, accountant, or representative of the IRS. I'll probably screw myself following my own advice. Decide for yourselves.