We don’t tax houses while they’re under construction, and we shouldn’t impose taxes on cryptocurrency while it’s staked.
Gains accrued by staking cryptocurrency should not be treated as a taxable event. It only makes sense to tax such gains upon their conversion to legal tender currency. To do otherwise undermines a marquee environmental policy from the administration of United States President Joe Biden.
The Internal Revenue Service appears strongly inclined to treat staking gains as immediate income. The penalties for getting sideways with the IRS can be draconian. And taxing, or threatening to tax, staking gains is bad policy — and, ahem, bad politics.
There are many excellent reasons not to treat staking gains in and of themselves as taxable events. The best reason is to put the IRS back in line with White House environmental policy to fight climate change.
If the IRS won’t administratively comply with the Biden administration’s clearly stated marquee policy, it’s time for Congress to clarify the law and prohibit the taxing of unrealized gains.
Deferring gains until sale merely defers receipt of taxes by the Treasury. It doesn’t cost the government even one thin satoshi. So, what’s going on?
Crypto is legitimately subject to taxes in many ways. You’ll pay taxes when you sell your crypto, or even exchange it for other forms of crypto. (Elsewhere, we have called upon Congress to enact a deferral for crypto-to-crypto exchanges, a subject beyond the scope of this article.)
Taxing staking gains is antithetical to a clearly expressed marquee White House policy. It’s also antithetical to generally accepted notions of good tax policy.
Uncle Sam does not tax Jasper Johns while turning a blank canvas into a multimillion-dollar artwork. He is not taxed when he consigns it to a gallery for sale at a posted price. He gets taxed when he is given the million-dollar check for his latest masterpiece.
This obviously makes sense. Uncle Sam won’t take a piece of a painting (or even a fractional interest therein) in payment of taxes. How would an artist be expected to pay the tax on a work-in-progress or a work merely listed for sale? Taxing artworks during their creation would be ridiculous!
Uncle Sam does not tax a building contractor while building a home, nor even when he turns it over to a realtor for sale. The IRS collects taxes upon sale.
This obviously makes sense. One can only guess at an asset’s value until it’s sold, and even then, one doesn’t have the cash to pay the taxes until sale proceeds are received. Moreover, the IRS doesn’t “do windows” — or take lumber or any other in-kind payment of taxes. Taxing housing under construction would be preposterous!
Taxing staking gains while they are in process is nonsensical and inconsistent with the treatment of other created assets. The IRS has staked out a real Alice in Wonderland policy on this one. And taxing such gains does Americans, and America, real damage, driving wealth creation and good jobs offshore (against stated presidential policy)!
Yet perhaps the most compelling reason for the IRS to stop taxing staking gains — and, if it does not, for Congress promptly to fix this — is that President Biden has made reducing CO2 emissions a signature administration priority.
The IRS taxing staking gains upon occurrence (rather than upon sale or exchange of those gains) badly undermines two of the administration’s top priorities: onshoring good jobs and fighting climate change. Bureaucracy trumps democracy? Shameful!
Support from Democrats on the Hill for their party’s leader for forbidding taxing staking gains may be assumed. And there are certainly enough sophisticated Republican Congresspersons to pass a law forbidding the taxing of staking gains.
So, what (no pun intended) is at stake? Proof-of-work crypto uses vastly more energy, generating vastly more emissions than proof-of-stake. Per the White House’s Office of Science and Technology fact sheet dated Sept. 8, 2022:
“From 2018 to 2022, annualized electricity usage from global crypto-assets grew rapidly, with estimates of electricity usage doubling to quadrupling. […] Switching to alternative crypto-asset technologies such as Proof of Stake could dramatically reduce overall power usage to less than 1% of today’s levels.”
Taxing those gains before they are realized will also cripple the movement to proof-of-stake.
To summarize, there are intractable practical problems in taxing an asset at its creation. People can only guess the value of an asset until sold. The IRS doesn’t accept payment in kind (were that even possible, as frequently it’s not).
Many taxpayers don’t have the actual cash to pay their taxes until realizing the proceeds of sale. It is cruel and counterproductive to turn honorable citizens into tax cheats and criminals via bad regulation. It will drive crypto, and the attendant jobs and wealth creation, out of the United States. And deferring taxation until sale postpones but does not cost the government any tax revenue.
Most of all, the treatment of staking gains as a taxable event undermines the Biden administration’s stated top priority of onshoring jobs and reducing CO2 emissions.
Stop treating staking gains as a taxable event! If Biden and the IRS turn a deaf ear, Congress should take up the issue.