Ethereum staking and unfair taxation of a “ Crypto Kitty ”

While members of the Ethereum blockchain community have come under criticism about how long it takes to switch to a new mechanism called “ staking ”, it’s hard not to notice that there is no definitive guide from the Internal Revenue Service (IRS) yet. on how those who “stake” their blockchain “tokens” and receive rewards will also be taxed.

It certainly is not addressed on the Ethereum Foundation as the main risks are listed such as losing Ethereum to go offline, malicious actions and non-validation; However, the idea of ​​understanding the tax consequences for your efforts to secure a blockchain network is definitely something for the masses to consider.

In November 2019, a paper addressing this issue for the first time called “ Cryptocurrency Economics and the Taxation of Block Rewards ” was written by Abraham Sutherland, University of Virginia School of Law. Sutherland notes in his article that he believes that no Congressional laws or Treasury regulations are needed to provide adequate taxation of block premiums.

The paper offers an analogy for those attempting to understand this nuanced concept by suggesting that they consider a fictional “cryptocurrency kitty”. Sutherland observes, “A sign on the kitten says,” These tokens are for those who keep the net. Those who maintain the net can take the tokens from the kitten and keep them. The Treasury wants to tax those who take the tokens from the kitten. ”

The ‘Proof-Of-Stake Alliance’ (POSA), a commercial group in Washington DC, is heavily focused on what the wrong kind of fiscal policy can mean for the future of blockchain in the US and abroad. Led by Evan Weiss, the founder of POSA, who remarked in an interview: “It is a turning point that the stakes are here to stay. It’s really important for us as people in industry to really try to socialize this and make sure regulators and policy makers understand the benefits of these systems and how they can have a huge impact on our economy and how they interact. “

Why should an Ethereum stakeholder worry? Now, according to Weiss, “you can actually be rewarded for securing the network and earning bulk rewards for doing so … staking these networks must have a different view than the guide issued in 2014. In some networks you are earning rewards every six seconds more “.

Congress wrote a letter that was backed by Coin Center, a Washington DC think tank that has been promoting the Bitcoin and Ethereum ecosystem to Congress for years, where it argues that these “ bulk rewards ” shouldn’t be taxed like income. The Blockchain Association has also started a “Stake Working Group” which similarly focuses on these issues. The other major non-profit organization for cryptocurrency and blockchain in Washington DC – the Digital Chamber of Commerce – launched a Tax Task Force in October 2019 and notes on its website that it is developing feedback for the IRS.

Weiss indicated his respect for all three organizations and a strong desire not to “step on their toes”. His hope is to see greater education of policy makers in what is a somewhat difficult concept to understand as to its importance, which is capable of having a negative impact on the sector if no action is taken.

Gary Gensler, the former chairman of the Commodity Futures Trading Commission (CFTC) and a professor of practice at MIT who is leading Biden’s transition team efforts on evaluating US financial regulators, could weigh on this issue. Although he suggested believing that XRP is a security and also that Ethereum is probably a security as well, Gensler claimed that “Crypto Kitties” is not a security. Perhaps Gensler will similarly think that law enforcement should take a light step in taking blockchain tokens from crypto kittens.

Disclosure: I personally bet for bulk rewards on the Proton blockchain. I don’t own any encrypted kittens; however I have a physical cat named Sundance.