[ad_1]
In the letter
- Ethereum 2.0 has finally been launched.
- But that launch brings with it important questions about how participants in proof-of-stake networks will be taxed.
- The IRS has yet to clarify. Decrypt contacted some experts to get answers.
Ethereum 2.0 is here, but the IRS guidelines on how it might be taxed are not.
The first phase of the 2.0 update, launched earlier this week, sees Ethereum officially begin its transition to a proof-of-stakeconsensus mechanism, from what is known as proof-of-work.
Proof-of-work involves verifying transactions with pure computing power, while proof-of-stake relies on “validators”, which point tokens to have the ability to verify blocks. In the context of Ethereum 2.0, rather than “mining” coins, computers are assigned ETH (the coin, not the protocol) as they verify in good faith (malicious validators can have their own ETH stocks “cut“From the system).
At this time, the IRS has not released any guidance on how stakers should go about reporting investments in Ethereum 2.0. And according to Roger Brown, head of tax and regulatory affairs for Lukka, a blockchain data and software company, the best we can do at this point is to try and guess some potential guidelines from the current tax code iteration.
One thing you probably won’t be taxed for, Brown says, is to transfer ETH into the Ethereum 2.0 deposit agreement. This is a process that has been going on for some time already: the launch of Ethereum 2.0 “Phase 0” earlier this week (it is the first phase of three planned) was made possible by community members who they have paid ETH into this deposit agreement; the contract required 524,288 ETH to lay the foundation for Ethereum’s future proof-of-stake.
Under existing tax principles, Brown said Decrypt, deposited ETH “is not considered a disposition, because you still own it”.
But the ETH that is actually assigned to the validators after they bet their money could very well be taxable, in the way that mined Bitcoin is. “The rewards for the bet have come in for you, as you are eligible to access the rewards,” Brown said. “This is treated as ordinary income, taxable at ordinary rates of income.”
Brown also made it clear that, in his view, the rewards from any proof-of-stake validation (not just Eth2) would likely count as ordinary tax revenue, unless those rewards were dilutive and split the existing tokens rather than assigning new ones.
But since it’s not yet set in stone and there have been no government guidelines on the matter regarding Ethereum 2.0, some members of the crypto community are actually lobbying Congress against taxing those rewards as they are generated.
Evan Weiss is the president and co-founder of the Proof of Stake Alliance, a group that is doing exactly that. Weiss said Decrypt that the group’s lobbying actually led to a letter by the four heads of the Congressional Blockchain Caucus (Darren Soto [D-FL-9], Bill Foster [D-IL-11], Tom Emmer [R-MN-6]and David Schweikert [R-AZ-6]) to the IRS, essentially asking that proof-of-stake rewards be taxed only when they are sold, as opposed to when they are initially created for stakers.
“Similar to all other forms of property created by taxpayers (or discovered by taxpayers) – such as crops, minerals, livestock, works of art and even objects off the assembly line – these tokens could be taxed when they are sold,” he says. the letter .
This appears to be Weiss’s main concern when it comes to Ethereum 2.0 taxation. “POSA believes that if staking reward tokens were treated as income at the time of creation (rather than when they are sold) it would be a compliance nightmare for both the IRS and taxpayers, “he said.” Wrong tax policy could indeed hindering the adoption of these networks and driving growth in jurisdictions that take a common sense approach to this problem. “
Weiss also cited a relationship by UVA law professor Abe Sutherland, who concludes that taxing proof-of-stake awards at the time of their creation “results in unfair taxation and would discourage US taxpayers from participating in this new technology.”
Shehan Chandrasekara, head of tax strategy at crypto software company CoinTracker, echoed Weiss’s concern that it’s not a question of whether rewards are taxable, but how they should be taxed. “The rewards earned are definitely taxable, no doubt,” he said Decrypt. “The question is when they should be taxed (at the time of receipt versus when you sell them).”
Chandrasekara added that he does not expect any clarification from the IRS anytime soon. But in a blog post on the matter, he pointed to another possible tax issue surrounding Eth2, namely whether or not ETH2 is distinct from ETH1. If they are indeed distinct, Chandrasekara says, the conversion of ETH1 to ETH2 (in the same way as exchanging one fiat currency for another) could be a taxable event.
But there isn’t much clarity on that either. For the official plan for the three phases of Ethereum 2.0, the pre-2.0 version of Ethereum will finally be relegated to a chain of fragments, which will run in parallel with the other Ethereum 2.0 chains. But the question of whether or not there is a real currency exchange somewhere along the way doesn’t have a clear answer, for now.
Marta Belcher, a lawyer at Ropes & Gray and a blockchain specialist, put a more precise point in an email to Decrypt: “The lack of clarity on these kinds of issues, in my opinion, creates unnecessary friction that damages innovation.”
Until the IRS sheds a little more light, Ethereum 2.0 stakers may have to keep tinkering in the dark.
