The IRS decision not to tax staking rewards on receipt may have far reaching implications for the crypto markets and pricing structure, even for proof of work coins. My thoughts on this.

For those not aware, the IRS has made an internal decision to refund USD taxes which were paid because of a person staking Tezos, and having to pay tax on the receipt of the staking rewards.

The idea here is that all forms of passive income, including crypto rewards, are similar to dividends or interest and you pay tax on that when received. Worse, once you actually sell, you are taxed again on the difference in price between the receipt and selling point. This may differ from country to country but it is the position in most countries.

So this creates quite a mess. Consider you do nothing but stake a token. Even if you never sell 1 penny, you are forced to pay taxes on those staking rewards. So you now have to sell down crypto to pay the taxes, which is itself a taxable event and that triggers more tax!

Well this taxpayer had an ingenious argument. Their theory was that crypto is property, and that creating new property out of thin air can never be income for tax purposes. The analogy is being a painter and painting new properties every day. Nobody would say each time you paint a painting it becomes taxable income.

So if this becomes codified or more widely recognised, passive long term staking will be much more tax friendly, and you will even have an incentive to hold longer.

Now there has been some misleading news regarding this (at least in the headlines). The IRS is not saying that you are NEVER taxed on the staking rewards, just that the receipt of the rewards is not itself a taxable event. But that creates a timing advantage and incentivizes a person to hold and not sell (just as I am extremely reluctant to ever sell my 2017 / 2018 bitcoins because the taxable event would be huge).

But here is the interesting point nobody is talking about. The same principle should also apply to bitcoin mining - as mining rewards are also property created out of thin air. There is no reason why the theory should be applied any differently as between mining and staking (remember there are virtually no crypto tax laws in countries, instead the existing laws and interpreted and applied).

And if bitcoin miners are no longer taxed on their regular mining (at least until they sell) they have a huge incentive to hold their rewards, ideally at least until the next tax year to defer any tax liability. That will then increase mining stockpiles and push up the price.

There is one caveat (I think) which is that many types of staking rewards are not newly created property. For example, staking LOOKSRARE gives you WETH rewards which already exist. Sushi rewards are "new" circulating supply, but paid from a contract address that holds existing Sushiswap tokens. This also creates a bit of a debate as to what coins "exist" and which ones come into existence (for example, rebasing tokens are a very very weird category).

So this has potential significant upside for the crypto markets. And while it is only an internal IRS decision, large players will now have massive incentive to apply for formal rulings or seek multi-million dollar tax refunds for tax already paid because of the receipt of crypto. For example, the publically listed bitcoin mining companies who will be able to fund armies of lawyers and tax accountants to argue the case. So then you have crypto investors having that tax reversed, so they will have cash to put back into the crypto system.