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Should there be a Tax on Staking?

Should taxes be paid when cryptocurrencies are received or when owners sell them? A court ruling in the United States could provide clarity on the matter.

IRS Tax forms
IRS tax forms (Photo by @walkingondream on Unsplash)

In brief

  • Plaintiffs consider crypto assets obtained by staking or mining to be created property.

  • Specialists debate whether or not the IRS offer can set a judicial precedent.

The U.S. Internal Revenue Service (IRS) is willing to reimburse the amount paid by a Tennessee couple for staking on the Tezos blockchain after receiving a lawsuit. The argument of the Jarrett couple, who is the plaintiff couple, is that the tokens obtained are property created by taxpayers and should not be taxed unless they are sold or exchanged. Their central argument is that no U.S. tax law or regulation allows created property to be taxed as income.

The Jarrett's have rejected the IRS offers, believing they should also be charged compensatory interest for the lost profits. In total, they expect to receive a refund of $3,793. The case is awaiting a judicial resolution, which could be between March this year and March 2023. The court will consult experts on the matter before deciding.

Some consider that the Tax Service's willingness to offer a refund could set a precedent for future tax cases that miners and people staking their tokens in the U.S. will have to pay in the future. On the other hand, public policy and tax experts believe that the court gave a settlement offer and, therefore, it does not constitute a binding agreement precedent.

The decision is only applicable to this particular case, as noted by Jake Chervinsky, the Blockchain Association's attorney and chief regulatory officer. The IRS has not made any official statement on whether this treatment will apply to the staking industry. Still, any plaintiff or attorney could use this case as a reference in the case of new court proceedings with a similar character. The decision has important implications for how miners and stake delegators will get taxed in the future. Many blockchains use Proof of Stake as a consensus algorithm, such as Cardano and Ethereum, when ETH2 goes live.

Bitcoin miners call for regulatory clarification.

The absence of regulatory clarity and confusion around crypto mining and token staking in the United States has been a factor that could scare away those in the industry. That would imply a tremendous lost opportunity, considering the exodus of miners who are still looking for a new place to develop their activity after expulsion from China.

The United States became one of the destinations of choice. However, puzzling situations at the tax level - for example, the recently passed Infrastructure Act - make it difficult to foresee how the story will continue.

Before the passage of the cited bill, Congressman Warren Davidson had said:

America led the Industrial Revolution, the advent of the automobile, and the Internet development. And now, America is about to lose that leadership with this technology. Warren Davidson

Other countries in the world are also emerging as potential destinations for Bitcoin miners. In Latin America, Paraguay stands out, which has low-cost hydroelectric power and a state that has explicitly stated its support for cryptocurrency mining. El Salvador, where the state itself became a Bitcoin miner, is a potential destination for exiled miners from China.

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