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  • Writer's pictureT Skevington and M Bacina

The State of Staking: Seeking certainty in proof-of-stake tax

Updated: May 2

To put it mildly, decentralised finance (DeFi) applications are doing alright at the moment. Many of these DeFi platforms already (or will) rely on staking protocols, whereby users 'stake' their digital asset and receive rewards, either in the form of interest, mining fees or similar.

Despite the success of these platforms, there remains widespread confusion about the tax treatment of the various forms of staking rewards. While some preliminary steps have been made, international tax offices have done little to address the confusion so far. That may be about to change, after four US lawmakers released a letter they had sent to the Internal Revenue Service (IRS) on the subject. Signed by Congressional Blockchain Caucus’ co-chairs Reps. David Schweikert (R-Ariz.), Bill Foster (D-Ill.), Tom Emmer (R-Minn.) and Darren Soto (D-Fla.), the letter asks the IRS to ensure taxpayers staking digital assets don’t get hit with both income tax and capital gains tax. In short:

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

The concern about a reporting and compliance nightmare comes out of the reality that most staking protocols distribute rewards following the creation of a new block, which usually occurs seconds or minutes. Each of these new blocks can be considered to be an independent taxable event, meaning taxpayers could potentially have hundreds of taxable events every year

In Australia, while the Australian Taxation Office (ATO) is yet to give specific and detailed guidance on the tax treatment of staking rewards, the default position has been set out on the ATO community forum as follows:

Ultimately, there is little reason for the ATO and other international tax authorities to change their positions or provide further guidance without being prompted by governments.

Will this prompt the ATO and other international tax authorities to revisit their thinking and guidance on digital asset staking taxation? A hope, a chance.


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