Tuesday, January 5, 2021

stakingtax.com -- A primer on the taxation of block rewards

From the executive summary; download the article at stakingtax.com:

  • An unsettled issue of immense practical and economic importance: how to tax the new “reward tokens” created in public cryptocurrency networks.
  • The wrong policy would drive innovation elsewhere. Fortunately, the correct policy is mandated by existing law: these new tokens – like all forms of new property – do not give rise to income until they are sold.
  • Informal, seven-year-old IRS guidance – not law – geared to Bitcoin and proof of work suggests reward tokens are immediate income at their fair market value on the date “received.”
  • For the newer proof-of-stake technology, this would create a compliance nightmare and punitive overtaxation.
  • Ethereum, Tezos, Cosmos, and many other proof-of-stake cryptocurrencies: compliance would be a daunting task – for the IRS as well as taxpayers. New taxable events would occur every few seconds.
  • “Income” under such a policy would overstate taxpayers’ actual economic gain – by 600%, for one typical Tezos taxpayer – resulting in demonstrable, systematic overtaxation.
  • The overtaxation is equivalent to taxing a 21 for 20 stock split by counting the “new” share – that is, 1/21 the value of an old share – as taxable income. 
  • Like any property, cryptocurrency tokens can indeed be “income” – when received as payment or as compensation.
  • But new property – property created or discovered by a taxpayer, not received as payment or compensation from someone else – is never income, and never has been.
  • Cattle, corn, gold, widgets, wild truffles, artworks, novels – think of any new property created or discovered by the taxpayer… It’s no one else’s expense, and it’s not income until sold.

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