IRS overtaxing Proof-of-Stake Networks

Four U.S. lawmakers wrote to the US tax agency, the Internal Revenue Service (IRS), on Wednesday July 29th requesting a more moderate approach towards cryptocurrency staking taxes.

Currently, the notion of overtaxing staking rewards obtained from cryptocurrency staking on the  ‘Proof-of-Stake’ blockchain is at the heart of the argument.  

The members of congress leading this movement are: David Schweikert, Bill Foster, Tom Emmer and Darren Soto. 

CoinDesk referenced the letter to bring to light the potential damming experience the taxation policy can have on both taxpayers who engage in the technology, and the Service. This is due to the fact that new blocks (considered an independent taxable event) can be created through staking protocols that in turn can release new tokens which lead to a tax nightmare. 

The letter argues: “It is possible the taxation of ‘staking’ rewards as income may overstate taxpayers’ actual gains from participating in this new technology,” and further “It could also result in a reporting and compliance nightmare, for taxpayers and the Service alike”. 

A harmful comparison used to explain the guidelines of taxing staking rewards is to treat it as income. Essentially, the idea is to associate block rewards with income the same way rental income is from lending a property. The issue is that this naturally can’t be equated and the taxpayer ultimately gets overtaxed. 

A reevaluation of the taxation method needs to be placed in order to bring forth a more sensible approach. For example, it isn’t common sense to tax fruits and vegetables the minute they are harvested. The level of difficulty experienced by experts in the crypto field following the IRS crypto tax guidelines highlights a key barrier to entry for newcomers. 

An inclusive analogy used to explain an appropriate guideline for taxing staking rewards is to treat it like new property; as Professor Abraham Sutherland of the University of Virginia tells CoinDesk. This is because “New property isn’t taxed as income right away, he said, but taxed when it’s sold”. 

Another approach the IRS could adopt is a similar stand they take regarding mining rewards; a ‘conservative’ method where one is taxed at the time the rewards are received. 

A key underlying argument in the letter is that of ensuring cryptocurrency remains approachable in a way to ensure further adoption by the American public. As highlighted, a major theme is that “the tax policy does not indirectly dissuade U.S. taxpayers from participating in thus promising new technology”. 

While the IRS has acknowledged in the past that some of the tax guidelines are ‘not ideal’ as CoinDesk reports; arguably, the letter highlights the inherent difficulty agencies have in keeping up with the crypto world. 

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